STOCKS ARE REBOUNDING FROM YESTERDAY'S SELLING -- THE DOW AND S&P 500 BOUNCE OFF 50-DAY LINES -- SMALL CAPS HIT NEW HIGHS WHILE NASDAQ TESTS TOP OF TRADING RANGE -- FINANCIALS REBOUND TODAY WITH BOND YIELDS -- THE EURO IS TESTING IMPORTANT CHART SUPPORT
DOW AND S&P 500 ARE BOUNCING OFF 50-DAY AVERAGES ... Stocks around the world sold off sharply yesterday (Tuesday) in a global flight from risk resulting mainly from a political crisis in Italy and, to a lesser extent, renewed threats of sanctions against China. A surge in Italian bond yields (along with Spain, Greece, and Portugal) caused a flight into developed market bonds in Germany and the US. European stocks lost more ground than us, but U.S. stocks had a bad day as well. The euro fell to the lowest level in ten months which pushed the dollar even higher. Markets are trying to recover today here and in Europe. For one thing, bond yields in Italy and Southern Europe are dropping today while other developed market bond yields are bouncing. That includes Treasury yields. The dollar is also pulling back against the euro (more on that shortly). So far, chart damage to U.S. stocks has been relatively mild. And support levels are holding. Chart 1 shows the Dow Industrials bouncing off their 50-day average after falling to a three-week low yesterday. Chart 2 shows the S&P 500 doing the same. The ability to stay above their blue lines would be an encouraging sign for both. The Nasdaq market and small cap indexes are doing even better.
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Chart 1
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Chart 2
NASDAQ HOLDS SUPPORT -- SMALL CAPS HIT NEW HIGHS... The ability of the technology-dominated Nasdaq market to hold up better than other stock indexes is usually a good sign for the market. Chart 3 shows the PowerShares Nasdaq 100 (QQQ) giving up little ground this week and still trading above its mid-April peak (flat trendline). The QQQ is also nearing the top of its May trading range. Small caps are doing even better. Chart 4 shows the Russell 2000 Small Cap Index surging to a new record high. That's most likely due to recent strength in the U.S. dollar (which usually favors smaller stocks), and the fact that smaller stocks have less exposure to foreign markets. But it's another good sign for the U.S. market.
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Chart 3
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Chart 4
BANKS AND FINANCIALS TEST SUPPORT ... Financial stocks in the U.S. were hit harder than most other stocks yesterday. Fear of contagion from eurozone banks played a role. So the did the plunge in Treasury yield. The green line in Chart 5 shows the 10-Year Treasury yield falling over the last week to the lowest level in nearly two months. The daily bars show the Financial SPDR (XLF) gapping down yesterday. The XLF is now testing support along its 200-day average (red line) and its April/May lows. Chart 6 shows the S&P 500 Bank SPDR (KBE) also losing ground, but remaining above its 50-day average (blue line). Its relative strength ratio (top box) also slipped this week. The KBE remains in the middle of a sideways trading range that started in late January. Today's rebound in Treasury yields is giving a boost to banks and financials.
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Chart 5
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Chart 6
OVERSOLD EURO IS TESTING CHART SUPPORT... One way to measure the level of confidence in the eurozone is to look at the chart of its currency. And there may some encouraging news. Chart 7 shows the euro plunging 6% against the dollar since the start of February. Yesterday's selloff pushed the currency slightly below its November intra-day low near 115 (first circle). Today's rebound, however, has boosted the euro back above that potential support level. In addition, the 14-day RSI line (top box) is bouncing from a deeply oversold level below 30. Needless to day, it would be a positive sign for Europe (and everyone else) if the euro can stay above that support level. The weekly bars in Chart 8 put the current test of euro support near 115 in better perspective by showing that it's not only a test of the late 2017 low; it's also a test of its spring 2016 high (see arrows). There's a lot riding on that support holding. Most of the dollar rally this year has come at the expense of the euro. What the euro does from here will tell us lot about dollar direction. A rebound in the euro might also restore some confidence in eurozone stocks and bonds.
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Chart 7
