FED'S DECISION TO BUY GOVERNMENT DEBT BOOSTS BONDS AND HELPS KEEP STOCK UPTREND INTACT -- GOLD AND GOLD STOCKS RALLY -- VIX STILL IN DOWNTREND -- ELI LILLY ACHIEVES BULLISH BREAKOUT
FED TO REINVEST MORTGAGE PROCEEDS IN LONG TERM TREASURIES... Although bond yields have been falling (and bond prices rising) for more than four months, bond traders still liked today's Fed announcement that it planned to reinvest mortgage proceeds into long-term Treasuries to increase the money supply and give an added boost to the U.S. economy. Bonds acted pretty much as expected. The 10-Year T-Note Yield (Chart 1) fell to another 52-week low while bond prices rose. Chart 2 shows the 7-10 Year T-bond iShares (IEF) hitting a new recovery high. TIPS also had a strong day. Chart 3 show the TIPS Bond Fund (TIP) hitting a new recovery high. The Fed news also lent support to stocks which had been falling earlier in the day, and gave a late boost to gold.
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Chart 1
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Chart 2
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Chart 3
STOCKS LIKE FED ACTION ... Stocks bounced after the Fed announcement after trading lower all morning. That late bounce helped keep the summer rally intact. The daily bars in Chart 4 show the S&P 500 ending the day above its (red) 200-day moving average (and last Friday's intra-day low at 1107). Chart 5 shows why that's important. The point & figure chart for the SPX (using a 5 point box) shows the p&f uptrend still intact (Chart 5). To achieve another bullish breakout, the SPX needs to close first at 1130 to reach a new August high and then 1135 to clear its June high. At the same time, it needs to stay above the last O column at 1110. A close at 1105 or lower would would trigger the first short-term sell signal since the summer rally began. The 30-minute bars in Chart 9 also show that a drop to 1105 would violate last Friday's low and interrupt the pattern of higher highs and lows.
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Chart 4
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Chart 5
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Chart 6
GOLD RALLIES ON LOWER RATES... Gold usually thrives on lower rates which may explain why today's Fed announcement gave a boost to gold assets. Chart 7 shows the Gold Trust (GLD) reversing higher today to end just below its (blue) 50-day average. Gold recently bounced off its (red) 200-day average and exceeded initial price resistance at its mid-July high at 117.50. Today's upside reversal puts GLD in position to challenge its 50-day average and early July peak at 119. Closes above both levels would be an added sign of strength for gold and gold stocks. Chart 8 shows the Market Vectors Gold Miners ETF (GDX) also reversing higher today and closing right at its 50-day line. Its relative strength ratio (below chart) is starting to rise as well. The GDX recently bounced off its 200-day line and chart support at its May low. The point & figure chart chart for GLD in Chart 9 (using a box sixe of .50) is already on a short-term buy signal.
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Chart 7
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Chart 8
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Chart 9
VIX STAYS BELOW 200-DAY AVERAGE... While the S&P 500 is trying to stay above its 200-day average, it's encouraging to see the CBOE Volatility (VIX) Index ending below its 200-day line today. That's because a lower VIX is good for stocks. The VIX would need to clear its 200-day line and its late July peak at 27.32 to turn its trend higher. Chart 11 shows a p&f downtrend in the VIX as well. On that chart, the VIX would have to reach 28 to exceed a previous X column and trigger a buy signal in volatility and a sell signal in stocks.
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Chart 10
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Chart 11
ELI LILLY BREAKS OUT... One sector that has done well historically in a low growth environment like the one we're currently in is healthcare. One stock in that group that caught my eye today is Eli Lilly. Chart 12 shows why. The weekly bars show the stock hitting a new nearly two year high today. Its relative strength ratio (below chart) has turned up as well. That's a pretty impressive chart pattern.
