USING BREADTH THRUSTS TO IDENTIFY REVERSALS -- BREADTH MOMENTUM REMAINS BEARISH FOR SPX AND NDX -- SURGE IN 10-YEAR YIELD OUTPACES RISE IN 2-YEAR -- YIELD CURVE STEEPENS TO 2011 LEVELS -- NOT ALL STOCKS ARE WEAK AS ONE ETF BREAKS TO A 52-WEEK HIGH
USING BREADTH THRUSTS TO IDENTIFY REVERSALS ... Link for today's video. Programming note: I will be on vacation from June 28 to July 12 (Friday to Friday). This is the all important two-week family vacation. My contributions to Art's Charts and the Market Message will resume on Monday, July 15. This will be the pause that refreshes! Thanks in advance for your understanding.
So the long-term trend for the S&P 500 remains up, but the medium-term trend is down, which makes this decline a correction within a bigger uptrend. When will it end? While nobody rings a bell at the bottom, chartists can watch breadth indicators for an up thrust that can signal a resumption of the bigger uptrend. Basically, we are looking for a bullish catalyst of some sort.
Chart 1 shows the S&P 500 with S&P 1500 AD Volume Percent ($SUPUDP) and S&P 1500 AD Percent ($SUPADP). AD Volume Percent equals advancing volume less declining volume divided by total volume. AD Percent equals advances less declines divided by total issues (1500 in this case). Chartists can use these breadth indicators to look for an up thrust that may signal the end to the current correction. A move above 85% in both AD Percent and AD Volume Percent would provide such a thrust. Think about what this number tells us. 85% tells us that advancing volume was at least 92.5% of the total volume. If advancing volume were 92.5% of total volume, then declining volume would be 7.5% of total volume. This means AD Volume Percent would be 92.5% less 7.5%, which equals 85%. The same rationale applies for AD Percent reaching 85%.
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Chart 1
The chart above shows both surging above 85% in June 2012 and mid November 2012. There were also joint surges above 95% in April 2012 and on December 31st, 2012. The April signal did not work out, but the December signal clearly ended the sharp decline and signaled the start of an extended advance. Most recently, chart 2 shows AD Percent surging above 85% the second week of June, but AD Volume Percent did not confirm this surge. The S&P 500 subsequently moved below its early June low and we are not waiting on fresh signals from both to provide a bullish catalyst.
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Chart 2
BREADTH MOMENTUM REMAINS BEARISH FOR SPX AND NDX... The breadth thrust signal shown above is for bottom pickers wishing to catch the first strong move off a low. Chartists looking for a more medium-term signal can use the percentage of stocks above the 50-day moving average. The raw indicator is pretty choppy so I am going to put on a twist to smooth it out and provide clear signals. Chart 3 shows MACD for the S&P 500 %Above 50-day SMA ($SPXA50R). This means we are measuring the momentum of this indicator to generate signals. The actual indicator is shown in the bottom indicator window for reference and the S&P 500 is shown in the middle window. Basically, the indicator is bullish when positive and bearish when negative. Some of the signals are great, while others are not so great, such as the bearish signal in late February and mid March. No indicator is perfect. Most recently MACD turned negative at the end of May and remains in bear mode. The indicator, however, is at an extreme negative level (-10) and near its November low. A strong upturn from here would provide the first positive signal. The medium-term, or trend following, signal would not trigger unless MACD turns positive. Chart 4 shows this same indicator for the Nasdaq 100 %Above 50-day SMA ($NDXA50R). Note that StockCharts provides this indicator for five different indices and three different moving averages. Click here for a list of available symbols.
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Chart 3
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Chart 4
SURGE IN 10-YEAR YIELD OUTPACES RISE IN 2-YEAR ... A surging yield curve is putting a bid into banking stocks as they outperform the market. Even though the yield curve is not the only consideration when looking at banking stocks, it plays an important part in bank profitability. Banks take in deposits and pay interest on these deposits, which are usually short-term in nature. Banks then take this money and lend it as loans, which are usually medium to long term. This means the bank captures the difference (spread) between short-term and long-term rates. The bigger the spread is, the bigger the profit margin. Chart 5 shows the 10-year Treasury Yield ($TNX) trading below 2% for most of the last 15 months. With a surge above 2.5% the last few weeks, this key rate is now at its highest level since August 2011. The 10-year Treasury Yield is a benchmark rate that is used to set many other rates, including mortgage rates.
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Chart 5
YIELD CURVE STEEPENS TO 2011 LEVELS ... Chart 6 shows the Yield Curve 10YR-2YR ($YC2YR) surging above 2.1 for the first time since August 2011. This means the 10-year Treasury Yield is over 2% more than the 2-Year Treasury Yield ($UST2Y). Note that the 10-year Treasury Yield is around 2.60% and the 2-Year Treasury Yield is around .43%, which is a difference of 2.17. The yield curve is surging because the 10-Year Yield is rising faster than the 2-Year Yield. The indicator window shows the correlation between the yield curve and the Regional Bank SPDR. Correlation was mixed in 2009, but has been largely positive since 2010. This positive correlation means a steepening yield curve is bullish for the Regional Bank SPDR.
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Chart 6
NOT ALL STOCKS ARE WEAK AS ONE ETF BREAKS TO A 52-WEEK HIGH... Chart 7 shows weekly bars for the Regional Bank SPDR (KRE) over the last two years. There was a strong advance from October 2011 to March 2012 and then an extended consolidation (yellow area). The current advance broke to new highs and the big trend is clearly up here. Using a measure move methodology, a similar advance from the November low could extend to the 39 area. The indicator window shows the price relative (KRE:SPY ratio) breaking above its 2012 highs to forge a multi-year high. KRE is clearly showing relative strength and leading the market. Chart 8 shows KRE with candlesticks over the last six months. I first showed this chart on Friday because of relative strength. KRE has since broken flag resistance and recorded a 52-week high. How's that for bucking the trend? Before getting too excited, note that the broader market remains in corrective mode and this could ultimately weigh on KRE.
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Chart 7
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Chart 8
TIPS AND COMMODITIES POINT TO DISINFLATION ... St Louis Fed President James Bullard made waves recently with his dovish comments and view that inflation expectations are falling. Chart 9 shows the Inflation Indexed Bond ETF (TIP) falling off a cliff the last few months and the Commodity Index Fund (DBC) breaking support with a sharp move lower the last two weeks. As its name suggest, TIP is where money flows when inflation expectations are heating up. Well, the exact opposite is occurring now. TIP was one of the best performing fixed-income assets in 2011 and 2012. The sudden plunge suggests that the market now expects the inflation rate to decrease, which is disinflation. This is not the same as deflation and I am not ready to even bring that one up yet. Before getting even more bearish, note that TIP is severely oversold and at a potential support zone from two key retracements. This could give way to an oversold bounce.
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Chart 9
Recent price action in commodities supports the disinflation scenario. PerfChart 10 shows year-to-date performance for gold, copper and oil. Note that this chart does not include today's price action. Including today's declines, Spot Gold ($GOLD) is down over 25%, and Spot Copper ($COPPER) is down over 15%. Spot Light Crude ($WTIC) is holding up with a small gain since January 1st. Chart 11 shows the Commodity Index Fund (DBC) within a large falling price channel since April 2011. The long-term trend is clearly down. Most recently, the ETF broke consolidation support with a sharp decline last week.
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Chart 10
