UKRAINE TENSION ON FRIDAY STALLS MARKET RALLY -- NASDAQ IS ONLY INDEX TO CLEAR 50-DAY AVERAGE -- DAILY MACD LINES FOR S&P 500 IMPROVE -- BUT WEEKLIES HAVEN'T -- BOND YIELD PLUNGE HAS MORE TO DO WITH WEAKNESS IN EUROPE THAN U.S.
NASDAQ LEADS MARKET HIGHER... The Nasdaq market led this week's stock market rebound (gaining 2.15%). Chart 1 shows the Nasdaq Composite Index ending the week well above its 50-day average, and within striking distance of its July peak. So far, the Nasdaq is the only major U.S. stock index to clear its 50-day line. Most of the week's Nasdaq gains came in the biotech and semiconductor groups. Chart 2 shows the Market Vectors Biotech ETF (BBH) rising to a new five-month high. [That also accounts for this week's strong showing in the healthcare sector]. Chart 3 shows the Market Vectors Semiconductor ETF (SMH) clearing its 50-day line. It's normally a good sign when the Nasdaq is leading the rest of the market higher. But the rest of the market has to do more to signal that the summer selloff has run its course.
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Chart 1
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Chart 2
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Chart 3
OTHER INDEXES REMAINS BELOW MOVING AVERAGE LINES... The Dow Industrials were the week's worst performers (+0.66%). Chart 4 shows the Dow rebounding off its 200-day average during the week before weakening on Friday. But the Dow remains well below its 50-day line. The Russell 2000 Small Cap Index gained 0.91%. Friday's pullback, however, kept the RUT below its 200-day moving average (Chart 5). Small cap stocks have been the market's worst performers since the spring, and need to do better if the market is going to recover. Chart 6 shows the S&P 500 Large Cap Index backing off from its 50-day line on Friday (but gaining 1.22% on the week). Friday's market selling was caused mainly by reports of more violence in Ukraine. The fact that volume was higher during the selling is of some concern, but may have also been caused by option expirations. A decisive close above its 50-day would improve the short-term trend for the SPX. The 14-day RSI line (above chart) rebounded from oversold territory near 30, and is trying to clear the 50 line. The daily MACD histogram (below chart) also turned positive on Friday for the first time in a month. Unfortunately, the weekly MACD histogram didn't show much improvement.
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Chart 4
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Chart 5
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Chart 6
WEEKLY HISTOGRAM BARS ARE STILL NEGATIVE ... Chart 7 overlays the "weekly" MACD lines on the S&P 500. The weekly lines turned negative three weeks ago and remain negative. Downturns in the weekly lines are usually more serious than daily turns. Problem is that the weekly lines turn up later than the dailies. Which brings us to the red histogram bars below the chart. Those bars plot the difference between the two MACD lines. A histogram drop below zero three weeks ago coincided with the red MACD line falling below the blue line. A histogram move above zero is necessary to turn the weekly lines positive. But the histogram bars start rising well before they cross the zero line and offer an earlier indication of market strength. The vertical lines in Chart 7 show that the first upturn in the histogram bars occurs much closer to market bottoms, and weeks before the two lines actually turn positive. The last time that happened was in April when the histogram bars started rising six weeks before crossing the zero line. So an upturn in the last histogram bar is the first sign that the market's "intermediate-term" downturn may have run its course. That hasn't happened yet. The last weekly histogram bar for the SPX is not only still below its zero line, but is lower than the previous bar. That has to strengthen if the current market bounce has staying power.
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Chart 7
EUROPE IS HELPING DRIVE TREASURY YIELDS LOWER ... The yield on the 10-Year Treasury Note fell to 2.34% this week which is the lowest level in fourteen months. Heavy buying of Treasury bonds in an apparent flight to safety was a big reason for the yield plunge. A bigger reason may have signs of economic weakness overseas, mainly in Europe and Japan. Japan's economy had a very bad second quarter, which kept pressure on its central bank to keep monetary policy very loose. Japan's 10-Year yield is the lowest in the developed world at .50%. Bad economic news also came from Europe's three biggest economies. France GDP growth is stagnant, while Germany's contracted. Italy slipped back into a recession. Weak inflation news also increased pressure on the ECB to take more aggressive approach to monetary policy, which would include quantitative easing. Expectations of that pushed the eurozone bond yields to record lows. The German bond yield slipped below 1% for the first time in history. With eurozone yields plunging, that puts downward pressure on U.S. Treasury yields. Compared to Europe and Japan, U.S. Treasury yields are a relative bargain. It does seem strange to see global funds pouring into the safety of bonds at the same time that the stock market is trying to recover from its recent correction. Something doesn't seem right here. It's usually not a positive sign when Treasury prices are rising faster than stocks. Chart 9 shows a ratio of the T-Bond 20+year iShares (TLT) divided by the S&P 500 trading near a six month high. That doesn't seem like a vote of confidence in the market or the economy.
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Chart 8
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Chart 9
GERMANY STILL IN A DOWNTREND... Germany is the largest economy in Europe and one of its weakest. Chart 10 shows Germany iShares (EWG) still locked in a downtrend. This week's rally attempt was stopped cold on Friday by news of Ukraine violence (in very heavy trading). It's hard to imagine the eurozone recovering without Germany leading the way. And as long as German stocks remain weak, a cloud will remain over other global stocks -- including the U.S.
