BOND YIELDS JUMP AGAIN IN EUROPE WHICH IS PRESSURING BONDS AND STOCKS -- TECHNOLOGY SECTOR REMAINS BELOW 50-DAY AVERAGE -- S&P 500 IS IN DANGER OF SLIPPING BELOW ITS 50-DAY LNE -- NASDAQ VOLATILITY REACHES EIGHT-MONTH HIGH
GERMAN 10-YEAR BUND YIELD REACHES 18-MONTH HIGH ... The jump in European bond yields that started last Tuesday is continuing. A weak French auction of 30-year bonds caused bond prices in Europe to fall sharply which pushed yields higher. Ten-Year French and German yields jumped 10 and 9 basis points respectively. [UK bond yields climbed 5 basis points]. Chart 1 shows the 10-Year German Bund Yield breaking through its 2017 peak to reach the highest level since January 2016. That's boosting Treasury yields in the U.S. The growing realization that global central bankers are behind the jump in bond yields raises the risk for stock markets, many of which are in overbought conditions. Which explains why global stocks are losing ground today.
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Chart 1
NASDAQ LEADS MARKET LOWER... As has been the case since early June, the technology-dominated Nasdaq market continues to underperform the rest of the market. Chart 2 shows the Nasdaq Composite Index falling further below its 50-day moving average. Its next potential support level is its mid-May intra-day low of 5996. More substantial support is at its March/April low. The 14-day RSI line is also losing momentum. It has fallen below 50 to the lowest level since April (42). To reach an oversold condition, however, it would have to fall to 30. The last time it dropped that low was last November. Its daily MACD lines (below chart) have undercut their April lows. That's not encouraging. Unlike the start of June when tech selling began, most other sectors are in the red today. Healthcare is down while financials are flat. That's starting to weigh on the rest of the market.
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Chart 2
S&P 500 IN DANGER OF SLIPPING BELOW 50-DAY AVERAGE... Chart 3 shows the S&P 500 in danger of slipping below its 50-day moving average. That wouldn't be surprising considering that its 14-day RSI line (above chart) is also weakening, while its MACD lines (below chart) are nearing the lowest levels of the year. That suggests that stocks are in danger of slipping into a short- to intermediate-term pullback. The first line of defense for the SPX is its mid-May intra-day low at 2352. More substantial support is at its March/April lows. That would still leave it well above its 200-day average (red arrow) and a major up trendline (green arrow). Chart 4 shows that green line as a rising support line drawn under its February 2016/ November lows. So far, no serious damage is being done to the market's major uptrend. The market appears due for a pullback or period of consolidation during the seasonally weaker summer months. Rising bond yields appear to be the catalyst for that happening.
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Chart 3
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Chart 4
NASDAQ VOLATILTY IS FLASHING WARNING... The media has been trans-fixed on the historically low reading of the CBOE Volatility (VIX) Index which measures 30-day implied volatility for the S&P 500. They may, however, be looking at the wrong index for warning signs. The red line in Chart 5 shows the CBOE Nasdaq 100 Volatility Index (VXN) surging to the highest level since last November. That's tied to technology selling in the Nasdaq 100. Its recent high reading of 18 is well above the 12 reading for the VIX. That's very unusual. Chart 6 shows the spread between the VXN and the VIX is the highest since 2007. That could start putting upward pressure on the VIX, and may be a warning that the period of unusually low volatility may be coming to an end. That would be happening while the era of quantitative easing is also ending. Those two factors combined suggest that time may also be running out on this eight-year bull market. In baseball terms, the market may be in the eighth inning of a nine inning game. Or, to borrow loosely from Winston Churchill, this may not be the end. But it may be the beginning of the end.
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Chart 5
