BOUNCE IN BOND YIELD SUPPORTS STOCK REBOUND -- BOLLINGER BANDS TURN POSITIVE AND S&P 500 CLEARS 50-DAY LINE -- BUT DECLINING VOLUME HASN'T CONFIRMED PRICE RISE -- WEEKLY MACD LINES REMAIN NEGATIVE
RISING BOND YIELDS SUPPORT STOCK REBOUND... Last Wednesday's message showed how action in the bond market offered clues to stock market direction. It showed the 10-Year Treasury Note Yield ($TNX) bouncing off its 200-day average (and staying above chart support at its October low). The message suggested that a bounce in bond yields could help support the stock market. That's because bond yields have been positively correlated to stock prices. The 60-day Correlation Coefficient (below charge) shows a positive correlation of .70 between the two. Bond yields turned down before stocks at the start of January. And last week's stock rebound coincided with the bounce in bond yields (see arrows). When bond yields rise, bond prices fall. Last week's message also showed the Barclays 7-10 Year T-Bond iShares (IEF) pulling back from a test of overhead resistance at its October high. The message further suggested that a failure there could support higher stock prices. That's because bond and stock prices are negatively correlated. That's confirmed by a negative reading of -.68 in their Correlation Coefficient (below chart). Since last Wednesday, rising bond yields and falling bond prices have coincided with rising stock prices.
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Chart 1
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Chart 2
BOLLINGER BANDS TURN POSITIVE... My message from last Wednesday applied weekly and daily Bollinger bands to the S&P 500 to help determine short-term market direction. At the time, the S&P 500 was trading below its 20-week and 20-day moving averages. I wrote that the S&P 500 needed to clear both lines to turn its short-term trend higher. That has happened. Chart 3 shows the S&P 500 having cleared its 100-day average (the equivalent of its 20-week line) and also its 20-day average. Now the S&P has to stay above both lines to keep its short-term upside momentum intact.
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Chart 3
LOW VOLUME ISN'T ENCOURAGING ... While the past week's price bounce ended the January stock market correction, the volume pattern bears watching. In a healthy rebound, it's normal to see volume pick up along with stock prices. So far, that hasn't been the case. In fact, it's been just the opposite. The past week's stock rebound has taken place on falling volume. Chart 4 shows PowerShares QQQ Trust rallying all the way back to its January high. Its short-term momentum indicators (RSI and MACD) have turned positive. Notice, however, that the green volume bars have declined while prices have risen. Yesterday's volume showed a slight increase, but was well below the red volume bars that took place during the recent price correction. That's a caution flag. Chart 5 shows the same pattern of declining volume for S&P 500 SPDRs (SPY). Although the SPY has cleared is 50-day line (which is good), volume hasn't risen (which isn't good). Chart 5 shows the Dow Diamonds (DIA) also rebounding on lighter volume. The DIA is the weakest of the three and has yet to clear its 50-day line. It's in the process of testing that resistance barrier.
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Chart 4
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Chart 5
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Chart 6
WEEKLY MACD LINES ARE STILL NEGATIVE... The daily MACD for all three stock indexes shown above have turned positive. Weekly MACD lines, however, are still negative. That's not unusual since weekly lines are slower to turn. Weekly lines, however, measure the stock market's longer trend. A strong stock market rally requires the weekly lines to turn positive as well. Chart 7 overlays weekly MACD lines on the S&P 500 over the last two years. The red bars along the bottom are MACD histogram bars which measure the spread between the red and blue lines. The histogram bars revolve above and below a zero line, and show us whether the two MACD lines are positive or negative. At the moment, they're negative. The chart shows the performance of the MACD lines (and histogram) during three previous market corrections. [I'm not counting the minor MACD upturn last July (circle) since the lines resumed falling]. In all three instances, positive turns in the MACD lines (and histogram) confirmed resumption of the market uptrend. The green lines showed that it usually took several weeks for that to happen. But that positive turn confirmed that the stock rally had staying power. One other thing. The yearend top in the two MACD lines ended at the same level as last May (while prices kept rising). That "double top" in the MACD line represents a possible "negative divergence" with the S&P 500. That makes me suspicious of the staying power of the stock market rally from here. It also reinforces my view that the market may run into bigger trouble as we approach the spring months.
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Chart 7
% NYSE STOCK OVER 200-DAY AVERAGE ISN'T KEEPING PACE ... Here's another reason why I'm suspicious of the strength of any market upturn from here. Although the stock market is within a few percentage points of a record high, only two-thirds of stocks on the NYSE are trading above their 200-day averages. The red line in Chart 8 plots the % of NYSE stocks over their 200-day averages ($NYA200R) relative to the S&P 500 since 2007. [The percentage scale is on the left side of the chart]. The two lines generally trend in the same direction, but not at the same pace. During the upsurge in 2009, the red line went from below 20% at the start of the year to 90% by the end. That reflected a dramatic turn in the market for the better. Readings in the red line over 80% generally reflect an overbought market. Subsequent drops below 70% have usually coincided with downturns in the SPX (2010, 2011, and twice in 2012). Which brings us to the present situation. At the start of 2013, 83% of NYSE stocks were trading over their 200-day averages. At the moment, only 67% are in that bullish position. While the S&P 500 rose 27% over the last year, the participation rate of NYSE stocks in that uptrend dropped by 16%. The falling trendline over the past year shows that bull market participation by individual NYSE stocks has lagged behind the rising market index by a noticeable amount. In my view, that suggests that any stock market rally between now and the spring will be on shaky technical grounds.
