BOND YIELDS PLUNGE AS TREASURIES LEAP -- JUNK BONDS CORRECT WITH STOCKS -- SMALL AND MIDSIZE STOCKS ARE PULLING S&P 500 BELOW 50-DAY AVERAGE -- ENERGY AND BASIC MATERIAL ETFS WEAKEN WITH COMMODITIES -- FOREIGN STOCKS ARE FALLING FASTER THAN U.S.
BOND YIELD PLUNGES AS BOND PRICES JUMP... The weak job reports from last Friday is having a bearish impact on stocks (as expected), but a bullish effect on bonds. Chart 1 shows the 10-Year Treasury Note Yield (TNX) gapping down sharply on Monday to fall back below its 50-day moving average in the process. That's a complete reversal of the trend of rising rates that took place during March. When bond yields fall, bond prices rise. Chart 2 shows the 7-10 Year Treasury Bond iShares (IEF) gapping sharply higher this week. While Treasuries are the biggest bond winners, most other bonds are bouncing as well. Investment grade corporates are modestly higher. The only bond losers are high yield (junk) bonds that are more closely correlated with stocks. Chart 3 shows the HIgh Yield Corporate Bond iShares (HYG) having fallen below their 50-day average and their March low as well. That's consistent with a downside correction in stocks.
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Chart 1
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Chart 2
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Chart 3
SMALLER STOCKS LEAD MARKET LOWER... Last Thursday's message showed the S&P 400 Mid Cap Index (MID) testing resistance along its 2011 highs. I suggested that was a logical spot to expect some profit-taking. Chart 4 shows the MID having broken its 50-day average and threatening its early March low. Chart 5 shows a similar downturn in the S&P 600 Small Cap Index (SML). A test of its March low appears imminent. Both indexes have broken up trendlines drawn from last October. Smaller stocks usually fall faster than large caps during market corrections. The S&P 500 Large Cap Index (SPX) has held up a bit better, but is rolling over as well. Chart 6 shows the SPX sitting right on its six-month up trendline . It's also in danger of slipping below its 50-day line in today's trading. That would set up a test of its early March low at 1340 (upper line). That would be a correction of 5.7%. If that support level doesn't hold, more important support exists along the last October high near 1292 (lower line). That would constitute a 9% correction. That would also correspond with a retest of the 200-day moving average. Assuming this is just a correction in an uptrend, it's very important that those lower support levels hold. The daily RSI line (top of Chart 6) has fallen below the 50 level, while the daily MACD lines (below chart) have turned negative.
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Chart 4
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Chart 5
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Chart 6
COMMODITY WEAKNESS HURTS ENERGY AND MATERIAL STOCKS ... Commodity prices are being sold along with stocks. Chart 7 shows the DB Commodities Tracking Index (DBC) trading below its 200-day average today. That's taking a bigger toll on energy and material stocks tied to commodities. Chart 8 shows the Energy SPDR (XLE) also trading below its 200-day line. Chart 9 shows the Materials SPDR (XLB) bearing down on its 200-day average (red arrow). A firmer dollar is contributing to the commodity selling.
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Chart 7
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Chart 8
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Chart 9
FOREIGN SHARES ARE FALLING EVEN FASTER... Another side-effect of a firmer dollar is that foreign shares usually fall faster than the U.S. during a market correction. Chart 10 shows Emerging Market iShares (EEM) threatening its 200-day average after having already fallen below its October peak. The solid line is the EEM/SPX ratio and has been falling since the beginning of March. Chart 11 shows EAFE iShares (EFA) already slipping below its 200-day line. The EFA/SPX ratio (solid line) is falling as well. You may recall my comments from last Thursday that the selloff in foreign shares increased the odds for a selloff in the U.S.
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Chart 10
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Chart 11
FIBONNACI TARGETS FOR THE DOW... Chart 12 overlays Fibonnaci retracement lines on the Dow Industrials to determine possible support levels. The lines are measured from the November low to the March top. The initial downside target is the upper line (at 12500) which represents a 38% retracement of the last upwave. The middle line (which coincides with the October peak) would constitute a 50% retracement of the November/March rally. That would constitute a fairly normal correction in an ongoing uptrend. That would also put the Dow closer to its 200-day moving average. As in the case of the S&P 500, however, it's important that the October peak and 200-day average contain the correction.
