S&P 500 IS THREATENING IMPORTANT SUPPORT LINES -- NEGATIVE WEEKLY SIGNALS OVERRIDE DAILY CHARTS -- BONDS AND STOCKS HAVE BEEN SENDING CONFLICTING SIGNALS -- IT LOOKS LIKE BONDS MAY HAVE BEEN RIGHT
BONDS AND STOCKS SEND CONFLICTING MESSAGES... One of the problems market watchers have been grappling with over the past couple of months is the conflicting messages being sent by bonds and stocks. Here's why. Chart 1 compares the S&P 500 (price bars) to the 10-Year T-Note Yield (green line) since the 2009 bottom. You can see that both lines have tended to rise and fall together. That makes sense because rising bond yields and rising stocks imply growing confidence in the economy. That was especially true when both turned up together in the spring of 2009 and last autumn (see arrows). That positive correlation, however, ended at the start of April. Chart 2 shows both peaking together in February, dropping together into mid-March, and then bouncing together until April. Since the start of April, however, the two markets have diverged. Stocks rose throughout April while bond yields dropped. I wrote recently that those diverging trends couldn't last for long. That's because they're giving conflicting messages. Rising stock prices imply economic confidence, while falling bond yields imply economic weakness. One of them is wrong. The 10-year yield has now fallen to the lowest level since last December and has undercut its 200-day average. The fact that this week's stock rally attempt failed so miserably, with the S&P 500 falling to the lowest level in six weeks today, suggests that the falling bond yield is starting to pull stocks lower as well. In other words, the bond market may have been giving the truer message of economic weakness.
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Chart 1
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Chart 2
WEEKLY SIGNALS OVERRIDE DAILIES... Wednesday's huge stock decline not only undid the previous day's positive price action, bit it undid the price gains of the previous four days. And it did so in heavier trading. Today's price decline has pushed the S&P 500 below last week's low and has put the S&P in danger of finishing below its 100-day average (green line) for the first time since last August. When positive daily trends (like Tuesday) are undone so dramatically in such a short period of time, there are usually larger forces at week. At such times, it's a good idea to see what the weekly signals look like. That's because weekly signals override short-term signals on daily charts.
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Chart 3
WEEKLY SIGNALS REMAIN NEGATIVE ... Charts 4 and 5 paint a negative picture for the S&P 500. Chart 4 shows the 14-week RSI (solid line) diverging from the S&P 500 during April (see red line) after having reached overbought territory over 70 during the first quarter. That shows loss of upside momentum in the market's "intermediate" trend. Chart 5 shows the weekly MACD lines turning negative during March. That's another negative warning. Negative weekly readings trump positive short-term action which I believe is what happened this week.
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Chart 4
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Chart 5
IMPORTANT UP TRENDLINE BEING THREATENED... Last Thursday, I showed the S&P 500 testing an up trendline drawn under its August/March lows, and suggested that it needed to stay above that support line to prevent a more serious downside correction. The S&P is threatening that support line today (see circle). Since this is a "weekly" chart, however, it would require a Friday close below that line to signal a downside violation. If that happens, the next likely downside target would be to its March low near 1250 which coincides roughly with its 40-week (200-day moving average) which is represented by the red line in Chart 6. That would also revert back to my recent Elliott Wave view that the market has completed a five-wave advance from last summer and is due for a pullback to the bottom of Wave 4 which is also the March low. I had hoped that Tuesday's upside reversal in global stocks would allow the market to sidestep that correction. I should have paid more attention to the negative signals on the weekly charts and also to the negative signal being given by bonds. By week's end, we should have a better idea of whether stock market support lines are holding, and whether the market is finally starting to follow bond yields lower.
