DOW JONES INDUSTRIAL AVERAGE MAKES NEW HIGH -- $SPX TRADES ON HIGHER THAN AVERAGE VOLUME -- $INDU:$RUT RATIO ACCELERATES WITH A PACE UNMATCHED SINCE QE3 STARTED -- VALUE LINE INDEX $VLE STARTS TO UNDER PERFORM

DOW JONES INDUSTRIAL AVERAGE MAKES NEW HIGH... The Dow Jones Industrial Average ($INDU) broke out to new highs on Thursday morning in Chart 1. At the close on Wednesday, the Dow had pushed and closed above 17100. This morning, we made an intraday high of 17151 before selling off to be down .94%. This outside reversal day (Higher high and lower low) can be indicative of a short-term trend change. One day does not make a trend so we will watch to see if it can recover.

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Chart 1

$SPX TRADES ON HIGHER THAN AVERAGE VOLUME... The SP500 ($SPX) had a relatively high volume day on Wednesday and again today on Chart 2. Wednesday was the highest volume in almost 3 months with the exception of the Quarterly Options Expiration day in June. Tomorrow is the options expiration (OE) day for July and as part of earnings season, I like to place a special emphasis on watching price action around this particular OE Day. The back-to-back high volume may just be repositioning for the next month ahead of OE or it could be adding to the clues for an intermediate trend change. The low volume stayed in trend with price moving higher.

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Chart 2

$INDU:$RUT RATIO ACCELERATES WITH A PACE UNMATCHED SINCE QE3 STARTED... The investor community appears to be changing focus as shown in Chart 3. The Russell 2000 Small Cap Index ($RUT) were outperforming the Dow Jones Industrial Average ($INDU) almost all of last year. The graph shows the Dow underperforming through 2013 (Chart trends lower). Recently, the switch has been very notable and the 10 trading days in July have seen the $INDU outperform every day.** This may be suggesting a switch in investor attitude towards risk.

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Chart 3

We can also see the trend line break on Chart 4 for the $INDU:$COMPQ ratio which uses the wider Nasdaq Composite ($COMPQ) and is generally considered a growth index. The $COMPQ has outperformed the $INDU by more than 50% since the 2009 low. A change in investor behavior towards this growth trend may be occurring as we near the end of US based stimulus. The Federal Reserve anticipates ending the stimulus in October. Notice on the perf chart on Chart 5, when you click on the chart, you now have the ability to pull up a perf chart with the exact settings including number of days. That's a new feature!

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Chart 4

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Chart 5

VALUE LINE INDEX STARTS TO UNDER PERFORM... One other area of underperformance is the Value Line Index ($VLE) shown on Chart 6. From Value Line:
An equally weighted price index of all stocks covered in The Value Line Investment Survey. Arithmetic refers to the averaging technique used to compute the average. Items to be averaged are added and their sum is divided by the number of items. The result is an arithmetic, or simple, average (or mean).

So while the major averages are going onto new highs, the arithmetic average is tracking but under performing the $SPX. This is a simple but important divergence.

This chart has a one day holdback on updating, so today's chart is from July 16. The area shown in green highlights when the $VLE outperforms the broad average $SPX - centre panel. It usually outperforms when the $SPX is in a major uptrend, so that is a nice clue for bull markets too. Unfortunately, here, it suggests the big bull move maybe over for now.

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Chart 6

BONDS SOAR TO NEW 52 WEEK PRICE HIGHS AND YIELD LOWS... The iShares 20 Year Bond Fund (TLT) gapped up out of the gate today and cruised to new highs. This has been a very difficult trade for most as each reversal point was slightly above or below the most recent short term high or low in June. Throughout the June consolidation, the stock market pushed higher. With the bond prices making new highs today, the equity market was down over 1 % on most indexes. The $INDU was -.94%.

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Chart 7

THE YIELD CURVE IS OSCILLATING IN DIRECTION... The yield curve is swinging In opposite directions as the Two Year Notes ($UST2Y) have been making yield highs and were at resistance yesterday. The long end of the curve, 30 year and 10 year bonds, have been testing yield lows which implies higher prices. More on that below.

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Chart 8

The 10 Year Note Yield ($TNX) is testing a critical support resistance area. Failure to hold here will probably dislocate other trading positions as the yield is below the 200 DMA and has been able to hold this area for most of this year. The 10 Year is a major guidepost for institutions. Below on Chart 10 is the 30 Year Bond Yield ($TYX) which is definitely pointing to a continuation down which might indicate that the 10 Year no longer holds here. The 30 Year has been leading the directional clues for some time now.

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Chart 9

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Chart 10

What is very odd is the yield of the 2 year note (Chart 8) is going up (big picture) while the 10 Year Yields (Chart 9) and the 3 Month T-Bill Yields (Chart 11) are going down. The 3-month is a sprint to safety. But the long-term major treasury issues like 10 Year and 30 Year are getting higher prices. Odd that the 2 year term between these others would be moving a completely different direction.

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Chart 11

10 YEAR BOND YIELDS ON MONTHLY CHART PREPARES TO FIRE OFF SIGNAL... Lots of institutional bond investors are focused on the very long-term charts. Just being aware of the MACD on the monthly 10 Year Yield ($TNX) is very important for trend. Currently the $TNX is at an important place for a signal on this long-term monthly chart 12. Note that the 40-month trend has changed slope but not enough to affect the view of the down-trend. We can see the 25 level, marked by the blue arrow (=2.5% Yield) as a critical level for the chart. This is where bonds accelerated down to in the depths of the crisis and stayed decidedly above or below ever since. We had one month below in 2008. This battle is important, but the monthly chart and the MACD would appear to suggest that the yield on the 10 Year is going lower. We still have another 2 weeks to finalize the monthly bar, but currently the MACD histogram is just barely above zero. The yellow zone is really a long-term hurdle. The recent rejection at that level in January is a meaningful test and a failure to break through. The monthly RSI is still bearish as well. The month is not done, but this chart currently suggests further strength in bond prices and a further softening in yields.

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Chart 12

HIGH YIELD BONDS SHOW SLIGHT WEAKNESS ... One of the other bond related charts is the High Yield Junk Bonds (HYG). This chart has broken through the 50 DMA for the first time since September 2013. With the 30 year price breaking out and the high yield price breaking down, investors should be aware of a 10 month trend change at this time.

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Chart 13

The Options Expiration Week is usually volatile. The big intraday reversal today was a move on volatility. It looks like a time to stay nimble. Major trend lines are cracking.
Good Trading,
Greg Schnell, CMT