MARKET INDEXES SLIP BELOW 200-DAY AVERAGES -- FEBRUARY LOW IS NEXT POTENTIAL SUPPORT LEVEL -- MORE FOREIGN CURRENCIES TUMBLE AGAINST DOLLAR AS THE YEN ATTRACTS SAFE HAVEN MONEY -- TREASURIES RISE WHILE HIGH YIELD BONDS FALL
S&P 500 IS TRADING BELOW 200-DAY AVERAGE ... Today's market slide has put the S&P 500 in danger of closing below its 200-day moving average (red line) for the first time in a year. The S&P has also lost 10% from its April high which makes this an official correction (if there was any doubt about that). The next support level to watch is the February intra-day low at 1044. This will remain a normal correction as long as that low remains intact. A close below that level would have more negative implications. [Unfortunately, most foreign stock markets have already broken that important support level]. So far, there's no convincing sign that the correction has run its course. In other words, things may continue to get worse before they can get better.
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Chart 1
MORE FOREIGN CURRENCIES TUMBLE ... In early April, I expressed the view that the rally in the U.S. Dollar Index was coming mainly from weaker European currencies which meant that the dollar rally wasn't as widespread as it appeared. To support that view, I showed three foreign currencies that were rallying strongly against the greenback that included the Australian and Canadian Dollars along with the Brazilian Real. It didn't hurt that those three currencies were tied to commodity-producing countries and showed that global traders were still willing to assume some risk. That situation has changed. The next three charts show all three currencies plunging below their 200-day moving averages. The hardest hit by far is the Aussie Dollar. Chart 4 shows that high-yielding currency plunging to the lowest level in nine months. Money leaving high-yielding currencies usually flows into lower-yielding ones like the Japanese yen in a flight to safety.
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Chart 2
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Chart 3
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Chart 4
YEN RALLIES ON SAFE HAVEN PLAY ... Global traders often borrow money in lower-yielding currencies (like the Japanese yen) and re-invest it in higher-yielding ones (like the Aussie Dollar). That practice is called the "yen carry trade". Traders essentially short the yen and go long something else. When markets turn down, and traders become risk averse, they sell their high yielding assets and buy the weaker ones back. That partially explains the recent rally in the Japanese yen. Chart 5 shows the Japanese Yen Trust (FXY) jumping sharply over the last couple of weeks on rising volume. The rally in the yen has coincided with rallies in other safe havens like volatility indexes, inverse (bear) funds and Treasury bonds. Not all bond prices are rising however.
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Chart 5
TREASURIES SURGE WHILE JUNK SELLS OFF ... I've pointed out before that the fixed income market has to be broken down into various component parts that don't always trade in the same direction. In times of stress like this one (especially with new talk of global deflation), Treasury notes and bonds have become the strongest asset in the world. Chart 6 shows the 7-10 Year T-Bond Fund (IEF) surging to the highest level in a year (as U.S. bond yields plunge). High-yield U.S. Corporate bonds, however, are taking a hit. Chart 7 shows the High Yield Bond ETF (JNK) slipping below its 200-day moving average. That also shows traders moving away from risk. Investment grade corporates are holding up better (Chart 8). That group, however, may also start to come under more pressure if the recent down becomes longer lasting.
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Chart 6
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Chart 7
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Chart 8
BEAR FUND STOPS... I suggested on Tuesday that the ProShares Short S&P 500 Fund (SH) could reach hits 200-day average before running into trouble. Chart 9 shows that bear fund touching that potential resistance line today. I had suggested stoploss protection below last week's intra-day low at 48.87 (although aggressive traders could raise that to just below 49.88). One reader asked for a similar number for the ProShares UltraShort QQQ (QID). Chart 10 shows that bear fund (which moves in the opposite direction of the Nasdaq 100) also moving higher. A couple of stopout points for QID present themselves below 16.74 or 15.95.
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Chart 9
