FINANCIALS LEAD LATE SELLOFF IN STOCKS -- LONG BOND ETF HOLDS BREAKOUT WITH BIG GAIN -- USING DOW JONES INDICES TO FOLLOW THE WORLD -- GERMANY AND FRANCE INDICES BATTLE RESISTANCE -- GREECE AND IRELAND LAG THE REST OF EUROPE
FINANCIALS LEAD LATE SELL-OFF IN STOCKS... Link for todays video. After bouncing around most of the day Monday, stocks were hit with selling pressure in the final hour and the S&P 500 closed near its lows for the day. Chart 1 shows the S&P 500 edging lower with a .57% loss on Monday. Despite this decline, the breakout around 1120-1130 is still holding. John Murphy wrote about broken neckline resistance turning into support on Saturday. A move below 1120 would break this support level and call for re-evaluation of the head-and-shoulders breakout. Within the market, the Finance SPDR (XLF) led the way lower with a 1.10% loss. Chart 2 shows XLF failing at resistance last week and breaking below support at 14.50. XLF and the Energy SPDR (XLE) are the only two sector SPDRs that have yet to break above their summer highs. XLF managed to surge back above 14.50 on Friday, but gave most of it back with todays loss. Relative weakness in the finance sector remains a concern for the overall market. The price relative (XLF:$SPX ratio) moved to a new low today as XLF continues to show relative weakness.
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Chart 1
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Chart 2
LONG BOND ETF HOLDS BREAKOUT WITH BIG GAIN ON MONDAY... News that the 2-year treasury auction recorded its highest bid-to-cover ratio in over three years spurred a rally in bonds. The bid-to-cover ratio refers to the amount bid versus the amount offered. Todays bid-to-cover ratio was 3.78, which means the bid amount was more than three times the offer amount. This suggests strong demand for short-term treasuries - even though these securities yield next to nothing. One has to wonder the rational for these bids. Treasuries at the short end of the curve continue to rise, which means short-term rates continue to fall. Strong demand at the short end also helped the long end of the curve (10 year, 20 year and 30 year bonds). Chart 3 shows the 20+ year Bond ETF (TLT) moving back above 104 by surging over 1.5% today. Overall, the ETF bounced off broken resistance and a key retracement to break flag resistance last week. After a pullback on Friday, bonds resumed their advance with Mondays surge. This bounce established short-term support at Thursdays low. Continued strength in bonds is potentially negative for stocks because these two have been negatively correlated throughout 2010. Stocks are holding their own for now, but this is something we should keep an eye on in the near future. Chart 4 shows the 10-year Treasury Yield ($TNX) moving inverse to the bond ETF.
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Chart 3
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Chart 4
USING DOW JONES INDICES TO FOLLOW THE WORLD... Stockcharts.com provides a number of Dow Jones country indices that can be used to monitor developments around the world. A complete list of Dow Jones indices can be found by searching for dow jones in the symbol catalog. These market capitalization-weighted indices perform in line with most of the main country indices. A comparison between the DJ Germany Index ($DEDOW) and the German DAX Index ($DAX) reveals a very high correlation. Chart 5 shows the DJ Germany Index in black and the German DAX Index ($DAX) in gray. These two moved step-for-step from October to early May. Volatility in May through these two a little off, but performance is still in line. The indicator window shows the price relative, which compares the performance of the DJ Germany Index to the German DAX Index. After flat-lining until late April, the indicator dropped sharply into early May as the two indices diverged. This is when volatility hit world markets hard. However, notice that this drop was from .040 to .039, which is pretty small. Moreover, notice how the price relative flat-lined again from late May until now. The DJ Germany Index captures the performance of the German DAX Index, and hence German stocks, quite well.
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Chart 5
So why use country indices from Dow Jones? First, there are many country indices to monitor. These include indices from Turkey and the Philippines. Chartists can even monitor European sectors such as the Dow Jones Europe Health Care Index ($E1HCR) or the Dow Jones Europe Technology Index ($E1TECH). Second, most of these indices are updated throughout the day. This means Stockcharts.com users can follow developments in Europe and the rest of the world in real-time or with a 15 minute delay. It depends on your charting package. This can be helpful when monitoring events in Greece, Ireland or mainland Europe. Third, these indices reflect the TRUE performance for the countrys stock market. ETFs and close-end funds are affected by management fees and currency fluctuations.
GERMANY AND FRANCE INDICES BATTLE RESISTANCE... Stock markets in Germany and France participated in the early September surge, but leveled out near resistance over the last two weeks. In contrast, the S&P 500 broke above its summer highs last week. In this regard, German and French stocks are showing relative weakness. Chart 6 shows the DJ Germany Index within a trading range since early June. The summer lows mark support and the summer highs mark resistance. A move above the summer highs would break range resistance and keep German stocks on a bullish trajectory. A confirming breakout in this key European index would also bolster the bullish case for equities around the world. The index established short-term support with last weeks low. A move below this low would be the first negative sign.
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Chart 6
Chart 7 shows the DJ France Index ($FRDOW) with a large rising wedge taking shape the last few months. As with the German Index, the DJ France Index is meeting resistance from the summer highs. In addition, the index is still battling resistance from the 62% retracement mark. There are no signs of weakness on the price chart yet and I am watching support from last weeks low.
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Chart 7
GREECE AND IRELAND LAG THE REST OF EUROPE... Dow Jones also has indices for Greece and Ireland that are updated in real-time. Chart 8 shows the DJ Greece Index ($GRDOW) in a clear downtrend over the last few months. There was a pop in July, but it was downhill in August and September. Greece has not participated in the September surge at all. Even though this is not good for Greek stocks, it has yet to pressure the big European stock markets or US markets. On the price chart, the index surged in July and met resistance near broken support from the February lows. Greece did partake in the early September surge, but gave back all these gains with a move below 120 last week. Greece shows relative weakness as it underperforms the S&P 500 and the German DAX Index.
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Chart 8
Chart 9 shows the DJ Ireland Index ($IEDOW) in a steady downtrend since early May. While the major European indices held their summer lows, the DJ Ireland Index broke to new lows in late August. There was a rebound in September, but the index met resistance near broken support from the summer lows. Look for a break above the September highs to reverse the downtrend. Such a breakout would also suggest that the worst is past for Irish banks.
