STOCK RALLY STALLS AT 200-DAY AVERAGE -- EURO DROP ON FRIDAY MAY EXPLAIN WHY -- COMMODITIES BOUNCE REMAINS BELOW RESISTANCE -- 70% OF NYSE STOCKS ARE BACK ABOVE 50-DAY LINES -- BOND YIELDS DON'T KEEP PACE WITH STOCK RALLY -- WATCH EUROPEAN BONDS FOR CLUES
STOCK RALLY STALLS AT 200-DAY AVERAGE... This past week's impressive stock rally ran into some profit-taking on Friday just shy of 200-day moving averages. Charts 1 and 2 show the S&P 500 and the Nasdaq Composite Indexex closing near their daily lows after nearing that important resistance barrier. The daily stochastic lines below Chart 1 turned up from a short-term oversold reading (below 20) which helped support this week's strong rebound. The two lines, however, are already nearing overbought territory over 80. Needless to say, those market indexes need to clear their 200-day lines if this week's rally is going to turn into something more meaningful.
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
DOLLAR BOUNCES OFF 50-DAY LINE ... Part of Friday's stock selling may be the result of a bouncing dollar. Chart 3 shows the DB Bullish Dollar ETF (UUP) bouncing off its 50-day average on Friday. The main reason for that was a drop in the Euro (which accounts for 56% of the UUP). Chart 4 shows the Euro selling off on Friday and remaining below its 50-day line. Global markets may need to see more of a bounce in the Euro to continue this week's central bank-inspired enthusiasm.
(click to view a live version of this chart)
Chart 3
(click to view a live version of this chart)
Chart 4
COMMODITIES TRACK STOCKS CLOSELY... Commodities rallied this week along with stocks, which continues their yearlong pattern of trending together. Chart 5 shows the DB Commodities Tracking Fund (DBC) ending the week above its 50-day average, but well below its November high. A trendline drawn over the July/August highs also comes into play near the November high as well. The DBC would have to clear both barriers to turn its trend higher in more decisive fashion. The line below Chart 6 shows how closely the S&P 500 has been tracking commodities.
(click to view a live version of this chart)
Chart 5
VIX DROPS TO 200-DAY LINE... This week's stock rally pushed the CBOE Volatility (VIX) Index sharply lower during the week. That makes sense since the VIX and stock market trend in opposite directions. Interestingly, the VIX is now testing potential support at its 200-day moving average (just as the S&P 500 is meeting resistance at its 200-day line). What the VIX does at that support line will help determine if this week's stock rally has any real staying power.
(click to view a live version of this chart)
Chart 6
70% OF NYSE STOCKS BACK ABOVE 50-DAY LINES... A couple of days before Thanksgiving (November 22) I showed the % of NYSE stocks trading above their 50-day averages falling below 50% which was a negative sign for the stock market. The good news is that this week's rebound has pushed that measure back above 70% which reinstates the market's short-term uptrend (Chart 7). Unfortunately, the % of NYSE stocks above their 200-day lines (which is the more important of the two indicators) is still in bear market territory at 31% (Chart 8). A move above its October low at 40% would be a big step in the right direction.
(click to view a live version of this chart)
Chart 7
(click to view a live version of this chart)
Chart 8
TREASURY YIELDS DROP ON FRIDAY... Throughout the year, I've shown several examples of the 10-Year Treasury Note Yield leading turns in the stock market. Chart 9 shows the S&P 500 (black bars) and the 10-Year Yield (colored bars) rallying together since early October. Unfortunately, the bond bounce hasn't kept pace with stocks. That's something to keep an eye on. It's also a good idea to keep an idea on European bonds since that's where most of the recent problems are coming from. Chart 10 shows the German Bund (blue line) bouncing off its October low to keep its uptrend intact. The Bund is Europe's equivalent of U.S. Treasury bonds in the sense that it attracts money when weaker European bond markets falter. The brown line shows the tumble in Italian bonds since August. This week's rebound in Italian bonds is mildly encouraging, although it gave back some gains on Friday. A stronger rebound in Italian bonds, and a further drop in the German Bund, would be a sign that the situation in Europe is improving. So far, the evidence isn't that convincing.
(click to view a live version of this chart)
Chart 9
