GLOBAL SELLOFF CONTINUES -- CRUDE OIL NEARS $25 -- CRB INDEX DROPS TO LOWEST LEVEL SINCE EARLY 1970S WHICH IS DEFLATIONARY -- TREASURY ETF BREAKS OUT TO UPSIDE AS YIELD FALLS BELOW 2%
LONG-TERM LOOK AT CRUDE... The price of crude oil continues to drop and is bringing global stocks down with it. The monthly bars in Chart 1 show how bad the decline has been and where it appears headed. The recent decline pushed WTIC Light Crude Oil below its early 2009 low near $33 which represented a major breakdown. Crude has fallen below $27.00 in today's trading which puts it at the lowest level since 2003. There's a small shelf of potential support formed during 2003 near $25. Next potential support below that is near $17. The only good news is that the 14-month RSI line (below chart) is in deeply oversold territory below 30 for the second time in the last year. Falling crude isn't the only problem. The entire commodity complex is collapsing (except for gold). The monthly bars in Chart 2 show the Reuters/Jefferies CRB Index of 19 commodities (plotted through yesterday) having fallen below its early 2000 lows to levels not seen since the the early 1970s. That's a deflationary chart. Commodity deflation isn't good for stocks. Historically, the only two assets that do better in a deflationary environment are Treasury bonds and gold.
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Chart 1
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Chart 2
BOND ETF BREAKS OUT AS YIELDS SINK ... The combination of plunging commodity and stock prices is pulling bond yields lower and prices higher. The daily bars in Chart 3 show the 10-Year Treasury Yield ($TNX) falling to the lowest level since October. Today's could be the first close below 2.00% since last April. A lot of that is a flight to safety into Treasuries bonds. Chart 4 shows the 7-10 Year Treasury Bond iShares (IEF) breaking through its 2015 highs to achieve a bullish breakout. Bonds are doing much better than stocks (which is normal when commodities are plunging). The IEF/SPY ratio (top of chart) has also broken out to the highest level in two years.
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Chart 3
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Chart 4
2015 LOWS UNDER PRESSURE... With global stocks plunging, it's no surprise to see U.S. stock indexes on the verge of breaking down themselves. And they're threatening their 2015 lows. Chart 6 shows the Dow Industrials bearing down on its August intra-day low. Chart 7 shows the Nasdaq Composite doing the same. Chart shows the S&P 500 already pressuring its October 2014 low. With stock indexes already in correction territory (losses over 10%), and no signs of a bottom, an eventual drop into bear market territory (more than a -20% drop) appears more likely.
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Chart 5
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Chart 6
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Chart 7
DOW TARGET ZONE... My weekend message showed the S&P 500 having lost -12% from last year's high, and suggested that it probably had another 10%-12% to go before reaching major support near 1600. The weekly bars in Chart 8 show potential downside targets for the Dow Industrials. The red lines measure Fibonacci retracements of the 2009/2015 bull run. A drop to 14000 would represent a 38% retracment which is usually pretty normal. That would also bring it back to its 2007 high which could act as a support level. Previous peaks often do. That would represent a decline of about -22% and would be enough to put it into bear market territory. It will most likely get there. The bigger question is what it does from there.
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Chart 8
THE VIX HAS MORE TO GO... One of the things we watch for to identify market bottoms is a spike in the Volatility (VIX) Index. So far, we haven't seen one. The daily bars in Chart 9 show the VIX struggling to get above the 30 level. By recent comparison, the VIX spiked above 50 intra-day during the August market drop before closing just above 40. That level, in the past, has signalled some type of market bottom (or at least a rally attempt). That suggests that the VIX has further to rise before peaking. Chart 10 shows why moves above the 40 level are so important. Closes above 40 identified market bottoms in 2001, 2002, 2010, and 2011. The spike to 80 during the 2008 crisis is probably an outlier. Chart 10 suggests that the VIX needs to clear 40 to even hint at a market bottom. Its current reading below 30 suggests that stocks have further to fall.
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Chart 9
