A LOT OF INTERMARKET DIVERGENCES ARE SHOWING UP ON PRICE CHARTS -- BOND YIELDS AREN'T RISING WITH STOCKS -- NEITHER ARE COMMODITIES OR FOREIGN STOCKS -- CANADIAN DOLLAR AND STOCK MARKET REMAIN STALLED AT OVERHEAD RESISTANCE
BOND YIELD DIVERGES FROM S&P 500 ... A number of intermarket linkages that have worked for years don't seem to be working in 2012. As a result, a number of intermarket divergences are showing up. One of them is the link between stocks and bond yields. Chart 1 compares the 10-Year T-Note Yield (green line) to the S&P 500 (black line) over the last two years. Prior to 2012, downturns in the bond yield hinted at economic weakness and eventually pulled stocks lower. That was especially true in the spring of 2010 and 2011 (see arrows). Since the start of 2012, however, the S&P 500 has rallied all the way to its 2011 high, while bond yields have stayed down (see trendlines). One of the reasons bond yields are staying down is that the Fed is buying long-term bonds. That appears to have distorted the more normal relationship between the two markets. If the stock rally is signalling economic strength, Treasury bond yields should be moving higher (and bond prices lower). The Fed's bond buying program (Operation Twist) ends in June which may keep bond yields down until then. It seems reasonable to expect the two markets to come back into closer alignment at some point. The Fed can't prevent markets from taking their natural course forever.
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Chart 1
COMMODITIES ALSO DIVERGE FROM S&P 500... Commodities and stocks have been closely linked for most of the last decade, and even more so since 2008. Chart 2 shows the two markets peaking together in the spring of 2011 and bottoming together during October. While the S&P 500 has risen to a six-month high, however, the CRB Index hasn't cleared its fourth quarter high (see trendlines). That creates an intermarket divergence between the two markets. It seems reasonable to expect that an eventual upside breakout by the stock market will start to pull commodity prices higher. [Historically, stock prices have usually turned up before commodities]. In the meantime, however, relative weakness in commodity prices may be hinting that the stock rally is overdone.
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Chart 2
FOREIGN STOCKS DIVERGE FROM U.S.... Another short-term divergence exists between the U.S. stock market and foreign stocks. Chart 3 shows the S&P 500 having reached potential resistance along its summer high (black arrow). At the same time, the Vanguard World Stock Index ex-USA (VEU) has yet to clear its fourth quarter high (brown arrow). Until it does, a negative divergence will exist between stronger U.S. stock and weaker foreign stocks.
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Chart 3
CANADIAN MARKETS REMAIN STALLED AT RESISTANCE ... I've written a couple of recent messages explaining the importance of Canada in the global intermarket picture. That's why I remain focused in the inability of Canadian stocks to clear their November high and 200-day moving average as shown in Chart 4. Its short-term trend also appears to be weakening a bit. The 14-day RSI line is in danger of slipping below the 50 level, while the daily MACD lines have turned negative. Any weakness in Canadian stocks would make U.S. stocks more vulnerable to short-term profit-taking. That's because the two neighboring markets are usually closely correlated. Chart 5 shows the Canadian Dollar in the same position as its stock market. The inability of the CDW to breakout to the upside may also be helping to keep a lid on commodity prices.
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Chart 4
