CONSUMER DISCRETIONARY SPDR LEADS SECTORS HIGHER -- JUNK BOND ETFS HIT 52-WEEK HIGHS -- TREASURY BOND ETF STALLS AT KEY RETRACEMENT -- DOLLAR BULLISH ETF BOUNCES OFF FEBRUARY LOW -- EURO ETF KEEPS DESCENDING TRIANGLE ALIVE

CONSUMER DISCRETIONARY SPDR LEADS SECTORS HIGHER... Link for todays video. The Consumer Discretionary SPDR (XLY) is the only sector SPDR to hit a 52-week high this week. The Utilities SPDR (XLU) and the Consumer Staples SPDR (XLP) are close to new 52-week highs, but have yet to actually break out. It is a rather strange trio because the consumer discretionary sector is the most economically sensitive and the other two are perhaps the least economically sensitive. Utilities and consumer staples are definitely defensive sectors. PerfChart 1 shows the percentage gains and losses for the nine sector SPDRs and the S&P 500. This past month was mixed with five sectors moving higher and four moving lower. The Finance SPDR (XLF) was the worst performer and the Utilities SPDR was the best performer. In a bit of a surprise, the Consumer Discretionary SPDR was the second best performer with a 1.82% gain.

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Chart 1

Chart 2 shows the Consumer Discretionary SPDR breaking triangle resistance with a surge last week and holding this breakout. No signs of weakness here. The indicator window shows the Price Relative (XLY:SPY ratio) surging the last six days. This relative performance indicator also hit a new 52-week high. New highs in the ETF and the Price Relative are positive for the stock market overall.

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Chart 2

JUNK BOND ETFS HIT 52-WEEK HIGHS... Junk bonds and stocks are positively correlated. This makes sense. Companies that issue junk bonds carry above average risk. The risk is that they will not be able to pay the interest on their bonds. This risk decreases as the economy improves because the ability to pay improves. Strength in junk bonds, therefore, points to strength in the economy and this is positive for stocks. Chart 3 shows the High-Yield Bond SPDR (JNK) moving above 39.5 this week and recording a new 52-week high. There is an outside chance that a broadening formation is taking place, but this pattern is potential at best. The 52-week high and strong uptrend are not potential. They are real. The blue dotted trendline marks the current upswing. A move below this trendline would reverse the 3-4 week upswing and chartists could then entertain thoughts of a broadening formation. The indicator window shows the Correlation Coefficient (JNK,$SPX). Except for a brief negative dip in early April, the indicator has been firmly positive for six months. Chart 4 shows the iShares High-Yield Bond ETF (HYG) with similar characteristics. Note that the historical price data at StockCharts.com has been adjusted for dividends

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Chart 3

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Chart 4

TREASURY BOND ETF STALLS AT KEY RETRACEMENT... While junk bonds are positively correlated with stocks, treasury bonds are negatively correlated with stocks. Again, this makes sense because treasury bonds represent the ultimate risk-off trade. A downturn in the economy, deflation and fears of European contagion all benefit treasuries. Also note that the Fed is dovish when concerned about the economy/jobs and hawkish when confident. April was a rough month for the stock market and treasuries took full advantage. The 20+ Year T-Bond ETF (TLT) surged above 117 and gained over 6% from mid March to late April. This strong move in treasuries could have been triggered by recent weakness in employment data. Employment related reports have been worse-than-expected the last five weeks. This Fridays employment report could make-or-break TLT. Chart 5 shows TLT consolidating near the February highs and the 61.80% retracement. This is a good spot for resistance that will likely hold if Fridays employment report is better-than-expected. A failure at resistance and break below last weeks low would put TLT back on the bearish track. This would be bullish for stocks because stocks are negatively correlated with treasuries. The indicator window shows the Correlation Coefficient (TLT, $SPX) spending most of the last six months in negative territory. On the other side of the coin, last weeks surge in stocks is unlikely to hold if TLT remains strong and breaks above its April highs. Such a move would suggest underlying weakness in the economy and this would be negative for stocks. Chart 6 shows the 10-year Treasury Yield ($TNX) for reference.

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Chart 5

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Chart 6

DOLLAR BULLISH ETF BOUNCES OFF FEBRUARY LOW ... Considering recent news out of the Euro zone, the Euro Currency Trust (FXE) has been holding up rather well with a bounce from 130 to 132 the last three weeks. Perhaps the market was focused on Dollar news the last few weeks. Currency traders were focused on an FOMC meeting last week and will focus on a batch of US economic data this week. Worse-than-expected economic reports would be Dollar bearish because they would insure that Fed policy remains accommodative and increase the possibility of QE3. Despite a worse-than-expected ADP Jobs Report today, chart 7 shows the US Dollar Fund (UUP) jumping today with a bounce off the late February low. It is too early to negate last weeks diamond break and MACD has yet to move above its signal line.

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Chart 7

EURO ETF KEEPS DESCENDING TRIANGLE ALIVE... US news flow, however, will dry up by Friday morning and this could bring EU news back to the forefront. There are three Euro-related items to watch going forward. First, note that Eurozone PMI fell to 45.9, which means the Eurozone is in a recession and the core is starting to feel the heat. Second, the European Central Bank (ECB) makes its policy statement on Thursday. The Draghi led ECB is pushing a growth compact, which mean the bank will shift its focus from price stability to growth. We know what this mean: print, print, print. Third, there will be elections in Greece and France on Sunday. Elections have been tough on incumbents supporting the policies of EU technocrats and these two are no different. Sarkozy is behind in the polls and the ruling Greek parties are expected to loose share in a big way.

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Chart 8

Enough of the funnymentals. We know that price action rules the roost and prices often ignore the fundamentals as we may see it. After all, who is not bearish on the Euro? In January, most pundits expected the FXE to be in the low 120s by now. However, chart 8 shows the Euro Currency Trust (FXE) getting a bounce when we least expect it and holding above the 130 level most of the last three months. Note that a descending triangle is still taking shape** and the upswing within this pattern reversed with todays decline. A break below the March-April lows would confirm the pattern and argue for at test of the January lows.