BOND YIELDS CONTINUE TO DROP AS AGRICULTURALS LEAD COMMODITY RALLY -- STOCKS CONTINUE TO TEST RESISTANCE AT JUNE HIGH AND 200-DAY AVERAGES -- BULLISH PERCENT INDEXES TURN POSITIVE
BOND RALLY CONTINUES... Bond prices of all categories rallied again this week. One bond ETF I've been tracking closely is the 20+Year T-bond iShares (TLT) which is shown in Chart 1. I recently wrote that the TLT needed a close below its early July low and its 50-day average to give a short-term sell signal. Chart 1 shows, however, an upside reversal day taking place on Thursday right at both support levels. Friday's disappointing second quarter GDP report pushed bond prices sharply higher. Chart 2 shows the 10-Year Treasury Note Yield (TNX) which falls when Treasury prices rise. Bond yields have been dropping since April. To the bottom right, a "descending triangle" pattern has formed during the month of July which favors a new low in the 10-Year Treasury yield. That's a potential negative factor for stocks since it implies that bond investors are still worried about a slowing economy and some deflation. [There's little the Fed can do to combat deflation. Short-term rates are already near zero. The idea that the Fed should buy longer-maturities to push long-term rates lower makes little sense either. The market has already done that with little economic impact].
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
AGS LEAD COMMODITY RALLY ... One argument against deflation (and a positive for stocks) is this week's strong rally in commodities. Chart 3 shows the CRB Index climbing above its 200-day average and breaking a 2010 down trendline. Commodity strength (which is feeding off dollar weakness) is normally a positive sign for the economy and stocks. There's a caveat, however, regarding the CRB rally. Most of it is coming from agricultural markets which include grains (corn, wheat, soybeans), livestock, and softs (cocoa, coffee, sugar). Unfortunately, those rallies are based on drought conditions in growing areas around the world and have little to do with economic strength. Chart 4 shows the PowerShares DB Agricultural ETF (DBA) surging to a six-month high. More economically-sensitive commodity groups aren't nearly as impressive. Charts 5 and 6 show industrial metal and energy ETFs still trading below their 200-day lines. Chart 7 shows the precious metal ETF bouncing off its 200-day line. Strength in commodities is normally a positive sign for stocks (especially stocks tied to commodities). In this case, however, the fact that the rally is concentrated mainly in weather-related agricultural markets detracts from that positive message.
(click to view a live version of this chart)
Chart 3
(click to view a live version of this chart)
Chart 4
(click to view a live version of this chart)
Chart 5
(click to view a live version of this chart)
Chart 6
(click to view a live version of this chart)
Chart 7
MARKET INDEXES STILL IN TESTING PHASE... Major stock indexes continue to struggle with chart resistance along their June high or their 200-day moving average. Chart 8, for example, shows the Dow Industrials stuck at its June high near 10600. Chart 9 shows the S&P 500 meeting resistance at its 200-day line. Prices need to clear both hurdles to signal that the July rally has some staying power. One argument in the bulls' favor is that fact that the 13-34 day EMA combination turned positive this week for the first time since early May (Chart 10).
(click to view a live version of this chart)
Chart 8
(click to view a live version of this chart)
Chart 9
(click to view a live version of this chart)
Chart 10
BULLISH PERCENT INDEX TURNS UP ... The NYSE Bullish Percent Index measures the percent of NYSE stocks in point & figure uptrends. Chart 11 shows the BPNYA peaking during April and giving a p&f sell signal during May. After stabilizing at 38, the last rising x column has risen above its previous x column at 50 which represents a buy signal. Chart 12 shows the Nasdaq 100 BPI giving a "triple top" buy signal which is even more impressive. There's never any guarantee those buy signals will work, but they do appear to support a bullish case. Having said that, I'd still like to see the major market indexes clear overhead resistance barriers to confirm these positive readings.
(click to view a live version of this chart)
Chart 11
