SECTORS REFLECT MIXED MARKET -- XLI AND XLY FORM CORRECTIVE PATTERNS -- BROKER-DEALER INDEX EXCEEDS PRIOR HIGH -- SCHWAB LEADS ETRADE AND TD AMERITRADE -- A BIG WEEK FOR TREASURY BONDS AND YIELDS -- 10-YR TREASURY YIELD STALLS NEAR OCTOBER LOW

SECTORS REFLECT MIXED MARKET... Link for today's video. The stock market as a whole has been quite mixed over the past month. Note that the S&P 500 SPDR (+1%) and Nasdaq 100 ETF (+3.3%) are up month-to-date, but the Russell 2000 iShares (-3.5%) and S&P MidCap SPDR (-1.5%) are down. As PerfChart 1 shows, the sectors have also been quite mixed over the past month. Notice that five sector SPDRs are up since June 27th and four are down. Of the four offensive sectors, the Technology SPDR (XLK) is the clear leader with the biggest gain. The Finance SPDR (XLF) and Consumer Discretionary SPDR (XLY) are lagging SPY with smaller gains. The Industrials SPDR (XLI) is seriously lagging because it sports a loss.

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Chart 1

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Chart 2

PerfChart 2 shows a mixed bag for the nine equal-weight sectors as well. The Equal-weight Technology ETF (RYT) and Equal-weight Healthcare ETF (RYH) are leading this group, while the Equal-weight Industrials ETF (RGI) and Equal-weight Utilities ETF (RYU) are lagging.

XLI AND XLF FORM CORRECTIVE PATTERNS... Even though the consumer discretionary and industrials sectors have been a drag on the market this month, they remain in long-term uptrends and their current pullbacks look corrective at this point. Chart 3 shows the Consumer Discretionary SPDR (XLY) breaking out in late May, consolidating with a pennant in June and breaking out again in late June. The orderly July decline formed a falling flag and a breakout would signal yet another continuation higher. Chartists can watch support from the July lows for the first signs of material weakness. The indicator window shows the Commodity Channel Index (CCI) moving below -100 to become oversold and bouncing back above -100 today.

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Chart 3

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Chart 4

The Industrials SPDR (XLI) chart looks interesting because the ETF is at support and short-term oversold. Chart 4 shows XLI peaking in early June and working its way lower the last seven weeks. The ETF is now at the top of its support zone, which is marked by the 50% retracement and broken resistance. Also notice that CCI became oversold for the second time in three weeks.

BROKER-DEALER INDEX EXCEEDS PRIOR HIGH... Chart 5 shows the Broker-Dealer iShares (IAI) hitting its highest levels since early April with a sharp advance the last three weeks. Over all, the ETF established long-term support with lows in February, April and May. Since the mid April low, the ETF has formed a series of rising peaks and rising troughs, which define the immediate uptrend (rising channel). While the ETF may be short-term overbought after this three week surge, the uptrend is positive for the group, the finance sector and the market overall.

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Chart 5

SCHWAB LEADS ETRADE AND TD AMERITRADE ... Chart 6 shows Charles Schwab (SCHW) breaking out in mid June, holding the breakout in mid July and moving higher the last two weeks. The stock is over 10% above its mid May low and the strongest of the three discount brokers. The indicator window shows the StockCharts Technical Rank (SCTR) moving above 70, which is a key level advocated by Greg Schnell.

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Chart 6

Chart 7 shows TD Ameritrade (AMTD) holding support in the 29.5 area in spring and then moving higher since mid May. The mid May trend line and July lows mark key support in the 30.50 area.

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Chart 7

Chart 8 shows E-Trade (ETFC) with a large support zone in the 19-20 area that has held since February. The stock has underperformed since late March, but did not break support. ETFC formed a big spinning top last week and surged on Tuesday. Look for a follow through break above 21.70 to reverse the July slide.

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Chart 8

A BIG WEEK FOR TREASURY BONDS AND YIELDS... The Fed makes its policy statement on Wednesday, the employment report is on Friday and there are a whole slew of economic reports this week. Needless to say, this is a big week for the bond market. If someone had told me in January that the S&P 500 would hit a new high in July and jobless claims would reach multi-year lows, I would have bet that long-term Treasury bonds would be down and yields would be up. That is definitely not the case. Instead, long-term Treasury bonds remain in uptrends and long-term Treasury yields are in downtrends.

Chart 9 shows the 7-10 YR T-Bond ETF (IEF) surging to its May high in mid July and stalling over the past week. The trend here is clearly up with support marked at 102. A sharp decline from current levels would put in a reaction high near 104 and chartists could then entertain thoughts of a double top. The indicator window shows the IEF:SPY ratio moving lower as Treasuries underperform stocks. Even though IEF is moving higher, it is not outperforming SPY and this is net positive for stocks. The trouble for stocks starts when/if Treasuries start outperforming stocks. Chart 10 shows the 20+ YR T-Bond ETF (TLT) breaking out in mid July and broken resistance turning first support in the 113 area.

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Chart 9

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Chart 10

10-YR TREASURY YIELD STALLS NEAR OCTOBER LOW... Whenever I analyze the long-term Treasury bond ETFs, I also look at the 10-YR Treasury Yield ($TNX) chart for confirmation. Keep in mind that Treasury yields move inverse to Treasury bonds. The 10-YR Treasury Yield, therefore, is pretty much a mirror image of the 7-10 YR T-Bond ETF. Chart 11 shows the 10-YR Treasury Yield falling to the October 2013 lows as it trends lower in 2014. There is support in the 2.45-2.5 area, but the seven month trend is down until proven otherwise. Volatility has contracted over the last few months as the Bollinger Bands contracted and BandWidth moved to its lowest levels in years. Something may need to give here. A break below 24 would extend the downtrend in yields and this would be bullish for bonds. Conversely, a move above the upper band and the July high would reverse the 2014 downtrend and project further strength towards 30 (3%). Chart 12 shows a daily chart for reference.

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Chart 11

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Chart 12

2-YR AND 10-YR YIELDS BECOME NEGATIVELY CORRELATED... Even though the 10-YR Treasury Yield fell sharply this year, the 2-year Treasury Yield ($UST2Y) rose and hit a new high for 2014. In fact, the 2-year yield is at its highest level since May 2011. Chart 13 shows the yield falling from .85% to .20% from April 2011 to August 2011. In the summer of 2011, the European sovereign debt crisis pushed money into short-term Treasuries and yields fell sharply. This year, the 10-year yield and the 2-year yield seem to tell different stories. The 10-year yield suggests that the economy is weak and the labor market is deteriorating. After all, weakness in the economy and labor markets would prompt the Fed to ease monetary policy, which implies lower yields. Strength in the 2-year yield points to strength in the economy and labor markets. Something needs to give at some point. Either the 10-year yield bounces off support and joins the uptrend in the 2-year yield or the 2-year yield peaks and turns lower as the 10-year yield breaks support.

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Chart 13

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Chart 14

Chart 14 shows the 2-year yield in red, the 10-year yield in black and the 26-week Correlation Coefficient ($UST10Y,$UST2Y) in the indicator window. In the last twenty years, the Correlation Coefficient dipped into negative territory just three times (summer 2001, December 2004 and now). The current negative dip is the deepest of the three. It is remarkable to see negative correlation and even more remarkable to see a strong negative correlation develop. Something needs to give. The last time the Correlation Coefficient turned negative (December 2004), the 2-year moved higher and the 10-year moved lower. This changed as both ultimately moved higher from mid 2005 to mid 2006. Is the 2-year again leading the 10-year?