STOCKS FAIL TEST OF 50-DAY LINES -- DOW AND S&P 500 FALL BELOW 200-DAY LINES -- TRANSPORTS, RETAILERS AND HOMEBUILDERS ARE ESPECIALLY WEAK -- INVESTMENT GRADE CORPORATES LEAD BOND PRICES HIGHER AS MOST COMMODITIES AND STOCKS DROP
DOW AND S&P 500 FALLS BELOW 200-DAY LINE... I wrote last Thursday that the next upside target for the market would be a test of 50-day averages. That test has taken place and, so far at least, appears to have failed. Yesterday's early enthusiasm about the rise in Chinese yuan ended with most stock indexes in the red. As Arthur Hill pointed out yesterday, that produced negative "outside reversal days" (when prices open higher and close lower). The first three charts show the Nasdaq, the Dow, and the S&P 500 turning down right at (or very close to) their 50-day lines. The only saving grace was that selling volume has been relatively light. Even so, today's selling made things even worse. Charts 2 and 3 show that the Dow and S&P 500 have fallen back below their 200-day lines. The Dow Transports tumbled nearly 4% and backing off sharply from its 50-day line (Chart 4). All sectors ended in the red with biggest losses in energy, materials, industrials, technology and consumer discretionary stocks. Retailers and homebuilders were among the biggest losers in the latter group. Chart 5 shows the S&P 500 Retail Index slipping below its 200-day line. Homebuilders are trading well below that long-term support level (Chart 6). [Please see my earlier message on the negative warning in homebuilding stocks and falling lumber prices]. Most commodities fell along with stocks. Once again, fixed income was the big winner.
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Chart 1
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Chart 2
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Chart 3
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Chart 4
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Chart 5
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Chart 6
CORPORATES HIT NEW HIGHS... Chart 7 shows the 7-10 Year T-Bond Fund (IEF) on the verge of a new high. Chart 8 shows the Investment Grade Corporate Bond ETF (LQD) already in new high ground. [Please see my earlier message on investor preference for corporate bonds over stocks]. As I wrote in that earlier message, investors appear to sense more economic weakness and continue to prefer bonds (in all categories) over stocks. Falling commodity prices also support rising bond prices. Chart 9 shows the DB Commodities Tracking Index Fund (DBC) failing a test of its 50-day line. The message for the last two days is that the budding summer rally is now in jeopardy.
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Chart 7
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Chart 8
