STOCKS RETREAT TOWARD SUMMER LOWS -- TREASURY BOND PRICES GAIN -- HIGH YIELD BONDS FALL WITH STOCKS -- DOLLAR DROP PUSHES SOME MONEY INTO GOLD -- VIX STAYS ABOVE CHART SUPPORT -- AUTOS AND BIOTECHS WEAKEN
AUTOS AND BIOTECHS WEAKEN ... Two groups that had recently held up better than others have experienced heavy selling this week. Chart 1 shows the Dow Jones Automobile Index falling back below its 50-day line. Its relative strength line (top of chart) has started to weaken as well. Volkswagen has lost a third of its value because of the recent emissions scandal. European auto stocks have been the hardest hit on that news, but Ford and General Motors have lost ground as well. I wrote last week that auto strength was a positive sign for stocks. This week, however, auto weakness has hurt the market. So has the drop in biotechs. Chart 2 shows Biotech iShares (IBB) falling back below its 200-day average. Its relative strength line (top of chart) has turned down as well. Biotech selling has hurt the Nasdaq market as well as the healthcare sector, which is the day's weakest sector. [Auto selling also pushed platinum prices to a six-year low and hurt stocks tied to that commodity. Platinum is used in diesel car engines where recent problems have surfaced].
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Chart 1
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Chart 2
STOCKS INDEXES CONTINUE TO RETREAT... U.S. stock indexes continue to head back toward their summer lows. Chart 3 shows the Dow Industrials having broken the lower line in the bearish "wedge" pattern that many of us wrote about a week ago. Other stock indexes have done the same. The Dow has reached its early September low just below 16000. It's doubtful that low will hold for long. A drop to its August low appears likely. Chart 4 shows a similar trend in the S&P 500 which has fallen to minor support near 1900. It's also doubtful that support will hold. Chart 5 shows the Nasdaq Composite weakening as well. The red line plots a relative strength ratio of the Nasdaq versus the S&P 500. Over the last month, the Nasdaq had done better than the SPX. The falling red line, however, shows the Nasdaq now leading it lower (thanks to biotechs and semiconductors).
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Chart 3
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Chart 4
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Chart 5
TREASURIES GAIN AS STOCKS DROP -- HIGH YIELD BONDS FALL WITH STOCKS ... As usually happens, Treasury bond prices are rising as stocks drop. Chart 1 shows the Barclays 7-10 Year Treasury iShares (IEF) jumping to a new high for the month. Most other bonds are rising as well -- with one notable exception. Chart 7 shows the High Yield Corporate Bond iShares (HYG) falling back toward its August lows. That's because high yield (junk) bonds usually track stocks more closely than bonds. [Falling stock prices raise the risk of defaults among smaller companies, especially in the embattled energy sector].
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Chart 6
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Chart 7
DOLLAR WEAKENS ON FALLING RATES... Lower U.S. rates are weighing on the dollar. Chart 8 shows the PowerShares Bullish Dollar Fund (UUP) slipping back below its 200-day line today. The biggest gainers are the euro and yen. Gains in those two currencies are hurting their respective stock markets. France and Germany have lost more than two percent today. Japanese stocks are down nearly three percent. The yen is also a safe haven currency.
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Chart 8
GOLD ATTRACTS SAFE HAVEN MONEY... The combination of falling global stocks, lower interest rates, and a weaker dollar are driving some nervous money to gold. Chart 9 shows the Gold Trust SPDR (GLD) climbing more than twenty dollars today. GLD may be nearing a test of its August high and its 200-day average (red line). Gold shares are up more than five percent today.
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Chart 9
VIX CONTINUES TO CLIMB... An upside reversal day in the CBOE Volatility (VIX) Index took place last Thursday as it bounced off important chart support near 20 (see circle) . That was the peak hit in mid-summer which is now acting as support. Although it hasn't gained that much over the week, the VIX continues to climb. A close above Tuesday's intra-day high near 26 would strengthen its short-term trend, which would be bad for stocks. The VIX would have close below 20 to give stocks a boost. [ NOTE: Janet Yellen is giving a speech today. It remains to be seen if she says anything that changes the current intermarket picture].
