TREASURIES SURGE AFTER RETAIL SALES REPORT -- 5-YR TREASURY YIELD HITS NEW LOW -- SPY HOLDS BOUNCE TO ESTABLISH KEY SUPPORT -- S&P 500 EQUAL WEIGHT ETF CONTINUES TO UNDERPERFORM -- HONG KONG AND AUSTRALIAN INDICES BREAK DOWN
TREASURIES SURGE AFTER RETAIL SALES REPORT... Link for todays video. The commerce department reported that June retail sales dropped .5%, which was the third consecutive monthly decline. With analysts expecting a small increase, this was yet another key economic report that came in below expectations. A decline in retail sales points to a slowing economy and this increases the chances for QE3. Chart 1 shows treasuries reacting positively to the news as the 20+ Year T-Bond ETF (TLT) moved higher on Monday. TLT remains in a clear uptrend with the June lows marking key support. This uptrend is negative for the stock market because TLT and SPY are negatively correlated. The indicator window shows the Correlation Coefficient (TLT,SPY) in negative territory for most of the last 12 months. Given the sharp advance in TLT this month, I am rather surprised how well stocks are holding up. In fact, I would suggest that something has to give and give soon.
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Chart 1
5-YR TREASURY YIELD HITS NEW LOW... With treasury bonds moving higher, treasury yields moved lower and the 5-yr Treasury Yield ($FVX) broke below .6% for the first time in a long time, perhaps ever. Chart 2 shows $FVX peaking in March 2012 and trending lower the last four months. The yellow areas show recent peaks and declines in the yield. The S&P 500 is shown in the indicator window for comparison. The last three declines in the yield corresponded with weakness in the S&P 500. First, $FVX fell sharply in July-August 2011 and stocks also moved sharply lower. Second, $FVX moved sharply lower in November and stocks followed a few weeks later. Third, $FVX peaked in mid March 2012 and moved sharply lower in April and May. Stocks also declined in April and May. Stocks have since rebounded in June-July, but the 5-yr Treasury Yield ($FVX) moved to a new low. Again, something has to give. A new low in treasury yields is a bearish indication for the stock market. Chart 3 shows the 10-year Treasury Yield ($TNX) for reference.
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Chart 2
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Chart 3
SPY HOLDS BOUNCE TO ESTABLISH KEY SUPPORT... Despite a negative retail sales report, stocks were holding up relatively well in afternoon trading. Chart 4 shows the S&P 500 ETF (SPY) stalling in the 135-136 area on Monday. There are at least two trends at work on this chart. First, I think the biggest trend is down because SPY broke support in May and the current advance looks like a corrective bounce. Second, the medium trend is up because SPY shows a series of rising peaks and troughs since early June. With Fridays surge, SPY forged a trough at 132.5 and this level becomes key support. Failure to exceed the early July high peak and a break below this trough would reverse the medium-term uptrend. More importantly, this would call for a continuation of the bigger downtrend and project further weakness below the June low. The indicator window shows MACD holding in positive territory to confirm the medium-term uptrend. A break into negative territory would turn this momentum indicator bearish.
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Chart 4
S&P 500 EQUAL WEIGHT ETF CONTINUES TO UNDERPERFORM... I remain concerned with relative weakness in the Rydex S&P 500 Equal Weight ETF (RSP). Chart 5 shows RSP with a price chart that looks similar to SPY. Note that SPY is weighted by market capitalization and the biggest stocks carry the most influence. The top ten components for SPY account for 21% of the ETF, but the top ten components for RSP account for just 2.45%. RSP gives us an idea of how the smaller stocks within the S&P 500 are performing and it is not good. The RSP:SPY ratio peaked in February and moved steadily lower the last five months. This means RSP is underperforming and showing relative weakness.
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Chart 5
I view this as a negative for the market overall because performance for the SPY is positively correlated to the RSP:SPY ratio. Chart 6 shows a weekly chart for SPY with the Correlation Coefficient (SPY, RSP:SPY) in the indicator window. These two have been positively correlated for most of the last four years. Note that ratio can be used when setting the parameters for the Correlation Coefficient.
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Chart 6
HONG KONG AND AUSTRALIAN INDICES BREAK DOWN... Chinese stocks were hit hard on Monday with the Shanghai Composite ($SSEC) falling over 1.5%. As John Murphy noted on Friday, weakness in Asia remains a concern for global equities and demand for raw materials. Chart 7 shows weekly bars for the Shanghai Composite over the last four years. This is an end-of-day (EOD) chart that will be updated after the close. The black line marks Mondays close. The index peaked in July 2009 and zigzagged lower the last three years. After a sharp decline in 2011, the index rebounded in the first half of 2012, but formed a triangle pattern and broke down in May. The indicator window shows the $SSEC:$SPX ratio in a clear downtrend as China underperforms the US.
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Chart 7
Weakness in mainland China could also be spreading to Hong Kong. Finance is the biggest sector and HSBC Holdings is the biggest component. Chart 8 shows the Hang Seng Index ($HSI) breaking rising wedge support and broken support turning into resistance around 20K. This breakdown signals a continuation of the prior decline (November to October). A move back above 20K is needed to negate this breakdown. The indicator window shows MACD moving into negative territory and remaining in negative territory.
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Chart 8
Chart 9 shows the Australian All Ords Index ($AORD) with a breakdown in July-August last year, a rising wedge and then another breakdown in May. The index has stalled since this most recent breakdown and remains in bear mode. A move back above broken resistance is needed to negate this breakdown. While these three indices do not represent all of Asia, they represent a big enough piece to be concerned with equity performance in Europe and the US.
