S&P DOWNGRADES GREEK DEBT TO JUNK AND CAUSES PROFIT-TAKING IN STOCKS AND BUYING OF US BONDS -- GOLD BOUNCES AGAINST DOLLAR AND REACHES RECORD AGAINST THE EURO -- 20% JUMP IN THE VIX SHOWS THAT OPTION TRADERS ARE TURNING MORE CAUTIOUS ON STOCKS

TREASURIES RALLY ... I wrote a message on April 17 to the effect that Treasury bond prices were starting to bounce from chart support (as yields were backing off from resistance at 4%), and suggested that a bounce in bond prices might cause a pullback in stocks. That's because Treasury and stock prices have been trending in opposite directions. Chart 1 shows the 7-10 Year Treasury bond iShares (IEF) challenging its 2010 highs. Chart 2 shows the 20+Year Tresury Bond iShares (TLT) climbing above its 200-day moving average for the first time this year. That shows that money is flowing back into Treasuries. That may be funds seeking a safe haven from today's lowering of Greek debt to "junk" status by Standard & Poors (Portuguese debt was also downgraded). At such times, U.S. Treasuries are usually the default asset of choice. Some of the money flowing into Treasuries (and other bond categories) is also coming out of stocks which are slipping today.

Chart 1

Chart 2

OTHER BOND CATEGORIES... The next three charts show how three other bond categories are faring today. The weakest of the three is the High Yield Bond ETF (JNK). Chart 4 shows JNK pulling back today from an overbought condition. The RSI line above Chart 4 is starting to weaken from overbought territory over 70. It's trend, however, is still up. Chart 5 shows the Investment Grade Corporate Bond Fund (LQD) hitting a new recovery high. The most impressive of the three is TIPS. Chart 6 shows the TIPS Bond iShares (TIP) having surged strongly over the last month and in the process of testing its fourth quarter high. It appears that investors still have an appetite for fixed income assets despite all of the recent advice to abandon them in favor of stocks. Then again, most of that advice is coming from Wall Street which makes it immediately suspect.

Chart 3

Chart 4

Chart 5

GOLD BOUNCES OFF NECKLINE AND HITS RECORD HIGH AGAINST EURO... While most commodities are experiencing profit-taking today, gold is rising. That's not surprising considering that gold is another default asset in times of financial stress. That's especially true when that stress involves foreign currencies like the Euro. Some of the money coming out of the Euro has to go somewhere. Some of it has been going into gold (which is often viewed as an alternative currency). The price bars in Chart 6 show Gold Trust Shares (GLD) rising today after having bounced off its "neckline" drawn over the January/March highs. The green line below Chart 6 shows the Euro dropping to a new low. The orange line shows gold hitting a new high against the Euro.

Chart 6

VIX JUMPS 20% ... The VIX has been falling since early February as the stock market has been rising. The unusually low VIX reading is a warning the stock market is over-extended. That warning becomes a bit more serious when the VIX actually starts rising as it's doing today. Chart 7 shows the VIX jumping 20% today and trading at the highest level in nearly two months. Chart 7 shows the last VIX rally in mid-January coinciding with a stock market pullback. The early February VIX peak coincided with a market upturn. Chart 7 shows that the VIX and the S&P 500 (green line) usually trend opposite directions. That's why today's unusually big jump in the VIX is a warning that traders are starting to buy more option protection against a possible market correction.

Chart 7

EUROPE LEADS EAFE DECLINE... Chart 8 shows EAFE Index iShares (EFA) falling more than 3% on rising volume. [EAFE stands for Europe, Australasia, and Far East]. Not surprisingly, today's biggest foreign losses are coming from Europe. Chart 8 also shows that the April peak in the EFA failed to exceed its January high. That sets up a potential "negative divergence" between foreign shares and the S&P 500 (green line) which has hit a new recovery high. The EFA is also bearing down on its 200-day average (red line) which acted as support during February. Let's hope it holds again. If it doesn't, global stocks could be vulnerable to more serious profit-taking.

Chart 8