NASDAQ LEADS REST OF MARKET LOWER -- A DEEPER CORRECTION NOW APPEARS LIKELY -- WEAK COMMODITIES ALSO WEIGH ON STOCKS AS BONDS RALLY -- YEN RALLIES AS AUSSIE DOLLAR WEAKENS
STOCKS INDEXES WEAKEN ON RISING VOLUME... It looks like traders and investors took the "sell in May" mantra seriously this week. Stocks fell sharply after Friday morning's weak April jobs report was released. The worst performance came in the Power Shares QQQ Trust which led the rest of the market lower. Chart 1 shows the QQQ tumbling 2.5% on Friday on huge trading volume. That's a bad combination. In addition, the QQQ fell well below its 50-day moving average (blue line) and negated the "island reversal" that formed the previous week (see top circle). That puts the April low in jeopardy. A close below that low would initiate a pattern of "lower highs and lower lows" which is symptomatic of a deeper correction. The next level of potential support would then be the early March low near 63. The QQQ/SPX relative strength ratio (below Chart 1) also shows the QQQ underperforming the S&P 500 over the last month. That shows loss of leaderhip by the technology sector which is another negative development. Chart 2 shows the S&P 500 falling back below its 50-day line after failing a test of its April high. It too fell below its 50-day line. A test of its April low now appears likely. From a sector standpoint, technology was the week's worst sector. Energy and materials were close behind and were weighed down by falling commodity prices. The three top sectors -- utilities, consumer staples, and healthcare -- are all defensive sectors. That type of defensive rotation is consistent with market weakness. Bonds rallied as stocks fell, while gold attracted some safe haven buying. The dollar bounced a bit on Friday as the Euro weakened.
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Chart 1
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Chart 2
OIL AND COPPER LEAD COMMODITIES LOWER... Economically-sensitive commodity markets took a drubbing this week as well. Chart 3 shows the DB Commodities Tracking Fund (DBC) tumbling to the lowest level in four months on Friday. Oil was hit especially hard. Chart 4 shows the United States Oil Fund (USO) falling 4% in very heavy trading. Copper also fell hard. Chart 5 shows the First Trust Copper ETF (CU) falling 3.5% to a new four-month low. Weakness in those two economically-sensitive commodities (and stocks tied to them) is also reflective of more economic pessimism. Money coming out of stocks and commodities moved into bonds.
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Chart 3
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Chart 4
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Chart 5
BONDS RALLY AS YIELD FALLS... Investors sell stocks and buy bonds when they're worried about the economy. And that's what they did this week. Chart 6 shows the 7-10 Year Treasury Bond Fund (IEF) closing above its January high on rising volume. As Treasury prices rose, yields fell. Chart 7 shows the 10-Year T-Note Yield falling to a three-month low. Apparently, bond investors aren't looking for yield. They're looking for safety.
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Chart 6
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Chart 7
RISK-OFF CURRENCY TRADE... Action in the forex market also shows that traders were in a "risk-off" mood this week. The Japanese yen is considered to be a safe haven currency. The Australian dollar is just the opposite. The Aussie Dollar is closely tied to economic trends in Asia (China is the biggest buyer of Australian natural resources). It is also closely tied to commodity prices. That's why this week's decision by forex traders to buy the yen and sell the Aussie is a sign of caution. Chart 8 shows the yen climbing to a two-month high. Chart 9 shows the Aussie Dollar falling to a four-month low. [The Australian central bank lowered short-term rates a more-than-expected half a point this week on fears of economic slowing in the Pacific region]. Chart 10 plots a ratio of the yen divided by the Aussie Dollar (orange line) against the Dow Jones World Stock Index (blue line) over the last year. The two lines trend in opposite directions. When investors get in a "risk-off" mode, they buy the yen and sell the Aussie which is what they did this week. The rising yen/Aussie ratio usually coincides with weaker global stock prices. And weaker commodity prices.
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Chart 8
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Chart 9
