STOCKS ENTER DOWNSIDE CORRECTION AS BOND YIELDS HIT TWO-YEAR HIGH -- S&P 500 TESTS 50-DAY AVERAGE -- WEEKLY INDICATORS SUGGEST POSSIBLE DROP TO JUNE LOW -- CISCO AND WALMART LEAD THE MARKET LOWER -- GOLD ASSETS CONTINUE TO GAIN GROUND
BOND YIELD RESUMES UPTREND... The uptrend that started in bond yields during May is resuming. Chart 1 shows the 10-Year Treasury Note Yield ($TNX) hitting a new recovery high today. That resumes the uptrend in bond yields. The weekly bars in Chart 2 show that the TNX is now trading at the highest level in two years. That confirms the upside breakout in the TNX that occurred during June when it exceeded its early 2012 high (see circle). The monthly bars in Chart 3 show the TNX also testing a falling resistance line extending back to its 2007 peak. A decisive close above that falling trendline would leave little doubt (if any still exists) that bond yields have bottomed and that the thirty-year bull market in bond prices has ended. That's bad news for bond prices that fall when yields rise. To the extent that rising bond yields are discounting an improving economy, that should be good for stocks over the long term. Over the short run, however, the jump in bond yields (and more talk of Fed tapering) is causing profit-taking in an overextended stock market.
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Chart 1
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Chart 2
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Chart 3
HOUSING AND REAL ESTATE STOCKS ARE BEING HIT HARD... Housing and real estate shares are being hurt the most by rising bond yields. Chart 5 shows the Dow Jones Home Construction iShares (ITB) falling to the lowest level since the start of 2013 and trading well below its (red) 200-day moving average. The dashed line, which is a relative strength ratio of the ITB divided by the S&P 500, peaked during May (when bond yields started rising) and has been falling ever since. Rising bond yields cause mortgage rates to rise which hurts the homebuilding industry. Chart 5 shows the Dow Jones Wilshire REIT ETF (RWR) also trading well below its 200-day average. Its relative strength ratio (dashed line) is tumbling as well. Rising bond yields diminish the need for higher-yielding stocks like REITs which pay high dividends.
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Chart 4
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Chart 5
S&P 500 FALLS TO 50-DAY LINE... Stocks have entered into a short-term correction. Chart 6 shows the S&P 500 falling to the lowest level in a month, and bearing down on its (blue) 50-day average. The 14-day RSI line (top of chart) has fallen below 50 implying more short-term weakness, and the MACD lines (below chart) have turned negative. The first test of support is the 50-day line. If the SPX closes below that line, a deeper correction is likely. [The Dow has already broken its 50-day line]. The next potential support levels would be the 50% and 62% (green) retracement lines drawn on the chart. The weekly bars in Chart 8 are of more concern. The 14-week RSI line (top of chart) is weakening from overbought territory over 70. Weekly MACD lines (below) may also be peaking. That suggests the potential for a deeper correction. If that occurs, the next major support level would be the June low at 1560. That support level also coincides roughly with the 40 week average (red line) and the lower 20-week Bollinger band. That should provide a solid support area if stocks fall that far.
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Chart 6
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Chart 7
CISCO AND WALMART LEAD MARKET LOWER... Two big stocks that are helping lead the market lower are shown below. Chart 8 shows Cisco (CSCO) tumbling 7% and falling well below its 50-day average. That's also weighing on the technology sector. Chart 9 shows Wal-Mart (WMT) gapping below its 50-day line as well. It remains, however, above its June low and its 200-day average. That's weighing on consumer discretionary stocks which have been market leaders.
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Chart 8
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Chart 9
GOLD ASSETS RISE ON FALLING DOLLAR AND WEAKER STOCKS... My July 23 message showed the Gold Miners Bullish Percent Index (BPGDM) having given a buy signal at 8 on its point & figure chart. Since then, the BPGDM has surged to 37. [The index is based on the number of gold miners on p&f buy signals]. Chart 11 shows the point & figure chart of the Market Vectors Gold MIners ETF (GDX) also giving a buy signal at 29. [A p&f buy signal is given when the latest X column exceeds a previous X column]. Chart 12 shows the Gold Trust SPDR (GLD) also giving a p&f buy signal at 132. The falling dollar started the gold rally going during July. A weaker stock market is also pushing some money into gold assets.
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Chart 10
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Chart 11
