GLOBAL STOCKS AND COMMODITIES PLUNGE -- EVEN GOLD SUCCUMBS TO PROFIT-TAKING -- YEN INTERVENTION BOOSTS DOLLAR -- BONDS ARE THE ONLY WINNERS -- EXCEPT FOR JUNK BONDS -- NASDAQ IS LAST U.S. INDEX TO BREAK MAJOR SUPPORT
JUNK BONDS TUMBLE WITH STOCKS ... With global stocks and commodities in a rout, most U.S. bonds are surging again. Chart 1 shows the T-Bond 20+Year iShares (TLT) continuing its recent surge (as bond yields tumble to the lowest level in a year). The only exception is high yield corporates. Chart 2 shows the Lehman High Yield Bond ETF (JNK) falling more than 2% and breaking its 200-day moving average. We've pointed out several times in the past that junk bonds are more closely tied to stocks than to bonds. Right now, junk bonds are following stocks lower.
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Chart 1
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Chart 2
YEN INTERVENTION GIVES DOLLAR A BIG BOOST... The U.S. Dollar Index (UUP) gapped higher today on rising volume (Chart 3). A large part of the reason was the 2.6% drop in the Japanese yen after Japanese central bank intervention to stop its rise (Chart 4). [A rising yen hurts Japanese exports]. Most other currencies are dropping as well (with the exception of the Swiss Franc which is marginally higher). As has been the case all year, a rising dollar usually coincides with weaker stocks and commodities. And that's certainly the case today.
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Chart 3
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Chart 4
COMMODITIES TUMBLE... Commodities are falling right along with stocks. The CRB Commodity Index is down an unusually large 8 points. Chart 5 shows the DB Commodities Tracking Index Fund (DBC) plunging 3.6% and threatening its 200-day line. Chart 6 shows the United States Oil ETF (USO) tumbling to a new 2011 low. Virtually all other commodities are also in the red, including precious metals. Chart 7 shows Silver iShares (SLV) tumbling 7% in rising volume. Gold is also selling off as traders are forced to raise cash. Mining stocks are down sharply as well.
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Chart 5
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Chart 6
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Chart 7
US STOCKS IN MAJOR DOWNSIDE CORRECTION... The last major U.S. stock index to break its 2011 lows is the Nasdaq Composite. Chart 8 shows the COMPQ falling below its March/June lows. That simply confirms the breakdown in other stock indexes. Chart 9 shows the Dow Industrials slipping below its March low at 1155 and in a clear downtrend. Chart 10 shows the S&P 500 having completed the "head and shoulders" topping pattern that I described on Tuesday (and Arthur Hill did the previous Wednesday). The circles show three clear peaks starting in February with the early May "head' surrounded by the February and July "shoulders". Tuesday's break of the "neckline" drawn under the March/June lows competed that bearish topping pattern. Today's plunge is simply confirming the new downtrend. The head and shoulders top, however, allows us to determine a potential downside target. That's done by measuring the distance from the top of the head (1370) to the neckline (1258) which is 112 points. That amount is subtracted from the point where the neckline was broken (1260). That yields a potential downside target to about 1150.
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Chart 8
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Chart 9
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Chart 10
POTENTIAL DOWNSIDE TARGETS... Chart 11 shows the S&P 500 uptrend that started last July. [It also shows that the April peak completed a five-wave advance which I wrote about at the time and which usually marks the end of major rallies]. With the head and shoulders top now completed, Fibonacci retracement lines (horizontal lines) help to determine potential downside targets. The current drop has already exceeded the minimum 38% retracement. The next potential downside target for the S&P is the 50% line at 1190. Given the proximity of that line to the November low at 1175, however, I'd use that lower number as the most likely target. The most pessimistic drop would be to the 62% line at 1150 which coincides with the 1150 head and shoulders target. That puts the likely downside target range in a zone between 1175 (-14%) and 1150 (16%). The S&P 500 has already lost 10% means that its already two-thirds of the way toward that target zone. The most likely time for any bottom to form would be in the September/October time frame.
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Chart 11
AN EVEN WORSE CASE SCENARIO... Unfortunately, we can't rule out the possibility that the current decline is part of something much bigger. The weekly bars in Chart 12 show that the S&P 500 has violated an uptrend line drawn under its 2009-2010 reaction lows. That raises the possibility that the entire two-year rally is in need of correcting. In that more bearish scenario, a couple of potential downside targets are to 1100 (a 38% retracement) or the April 2010 low at 1010 (roughly a 50% retracement). The latter number would mean a loss of approximately 26% from its recent high. Notice also that weekly MACD lines (above chart) turned negative during April after failing to exceed their late 2009 peak. That type of "negative divergence" is another warning that the current decline is more than just a short-term setback. Either of the bearish scenarios described herein warrants a very defensive stance. At such times, short-term oversold bounces (like yesterday's) don't usually last long.
