STOCKS EXTEND STALL - BONDS DECLINE ON BERNANKE REMARKS - HIGH YIELD BOND ETF HIT HARD - CORPORATE BOND ETF FORMS LOWER HIGH - JUNK VERSUS INVESTMENT GRADE - PERCENT OF STOCKS ABOVE 50-DAY PLUMMETS

STOCKS EXTEND STALL... Link for todays video. Stocks stalled again on Wednesday with the major indices finishing mixed. Actually, most indices were down slightly with fractional gains coming from the Russell 2000 ($RUT) and the S&P 600 SmallCap Index ($SML). Small-caps showed a little relative strength today. Eight of the nine sectors were down, but declines were muted. The Financials SPDR (XLF) was the only sector SPDR to gain on the day. Investors/traders appear to be holding their breadth ahead of tomorrows European Summit, which may shed some light, or darkness, on the current situation with Greece. Incidentally, StockCharts.com users can follow the Greek ($GRDOW), Spanish ($ESDOW) and Portuguese ($PTDOW) indices throughout the day with the Dow Jones index symbols shown in parentheses. Chart 1 shows the Russell 2000 ETF (IWM) stalling near the 62% retracement mark over the last four days. In addition, 10-day RSI has been near oversold levels (30) the last two weeks. The combination of retracement support, indecision and oversold conditions could give way to a bounce. I will be watching resistance at 60 for signs of strength.

Chart 1

BONDS DECLINE ON BERNANKE REMARKS... In his testimony before the House Financial Services Committee, Chairman Bernanke suggested that the Fed would have to raise interest rates at some point. Bernanke in particular suggested that the Fed may raise the Discount Rate to bring Fed lending in line with current conditions. While there was no concrete change in Fed policy, the bond market did not take kindly to these words and sold-off rather sharply in early afternoon trading. Chart 2 shows the 20+ Year Treasury ETF (TLT) hitting resistance in the 92-93 zone and plunging below 91. TLT broke support around 92 with a sharp decline in December. This broken support zone turned into a resistance zone. Also notice that TLT retraced 50% of the December decline. Todays sharp decline reinforces resistance and keeps the current downtrend alive.

Chart 2

Chart 3 shows the 7-10 Year Treasury ETF (IEF) also declining rather sharply on Wednesday. However, notice that IEF is generally less volatile than TLT. This is because the duration, which measures sensitively to changes in interest rates. In general, the longer the bond (time), the higher the duration. TLT was down .95%, while IEF was down only .28%, about one third the decline in TLT. Turning back to the IEF chart, a rising wedge formed over the last six weeks and IEF is testing wedge support with todays decline.

Chart 3

RATES RISE AS BONDS FALL... Talk of future rate increases actually raised interest rates in the present. This is one of the reasons the bond market moves ahead of the Fed. Slight changes in the Fed talk are built into bond prices over time. When the Fed finally does act on interest rates, the bond market has often already moved. Chart 4 shows the 10-Year Treasury Yield ($TNX) finding support around 3.6% (36) and moving higher today. Notice that there is also support from broken resistance and the 50% retracement. $TNX is on the verge of breaking the falling wedge to signal a move higher. This chart is pretty much the mirror image of the 7-10 Year Treasury ETF (IEF) chart.

Chart 4

HIGH YIELD BOND ETF HIT HARD... The appetite for risk can be seen in the high yield debt market. These bonds are also referred to as junk bonds, which are below investment grade. Higher return always comes with higher risk. Chart 5 shows the iShares iBoxx High Yield Corporate Bond ETF (HYG) falling over 5% in the last five weeks. This is the sharpest decline since this bond ETF bottomed in March. At this point, the ETF is short-term oversold and nearing support around 83, which stems from the 38% retracement and the late October low. We could see a little bounce here, but this correction may not finish until a deeper retracement towards the 62% mark around 79. The bottom indicator window shows the ETF with the S&P 500. Notice how closely correlated these two are. A rise in high yield bonds corresponded with an appetite for risk that spilled over into stocks.

Chart 5

CORPORATE BOND ETF FORMS LOWER HIGH... There are signs of a trend change in the iShares iBoxx Investment Grade Corporate Bond ETF (LQD). Chart 6 shows LQD forming a lower high and declining below 104 with a sharp move lower today. This ETF bottomed around 75 in October 2008 and formed a higher low around 87 in March 2009. With the move to 105 late last year, the ETF was up over 20% from its March low. Thats quite a run for a bond fund. It now looks as if this run could be coming to an end. The lower high in January and triangle break in February point to lower prices ahead. The next support level is around 102 from the October lows.

Chart 6

COMPARING JUNK WITH INVESTMENT GRADE... A price relative comparing junk bonds with investment grade bonds is another way to measure the appetite for risk. Chart 7 shows such a price relative with the HYG:LQD ratio. HYG represents junk, while LQD represents investment grade. The price relative bottomed in March, surged into April-May and then started working its way higher. Junk outperformed investment grade from March to early January, which is when the stock market rose. Even with the decline over the last 5 weeks, the overall trend here remains up. A rising price channel has taken shape the last 8-9 months with the November lows marking support. A break below this level would reverse the relative uptrend in junk and suggest that investors were coming more risk averse. This, in turn, would be negative for stocks.

Chart 7

PERCENT ABOVE 50-DAY PLUMMETS... The percentage of NYSE stocks above their 50-day moving average plunged to its lowest level since March 2009. I featured this indicator in the January 27th Market Message as it moved below 50%. Chart 8 shows this indicator ($NYA50R) finding support around 30% in early July and early October, but not in early February. The move below the prior lows shows an increase in downside participation. Notice the lower higher in September and January as well as the lower lows in early November and early February. Fewer stocks moved above their 50-day lines during the rallies and more moved below their 50-day lines during the declines. At this stage, this indicator is currently in bear mode as long as it remains below 50%. The green dotted lines show when the indicator surged back above 50% in mid July and early November. These moves coincided with a resumption of the uptrend.

Chart 8

The percentage of Nasdaq stocks above their 50-day moving average ($NAA50R) testing its early November low. In an interesting twist, more Nasdaq stocks are above their 50-day lines than NYSE stocks. This shows a little relative strength within the Nasdaq. In addition, the Nasdaq indicator did not break below its early November low. There is a support zone around 30-40% that held in early July and early November. With the indicator back in this zone, an important test is at hand for the bulls. A move back above 50% would be bullish for the indicator. The green dotted lines show the July-December moves above 50%.

Chart 9