STOCKS ATTEMPT TO STABILIZE NEAR SUPPORT -- BOND PRICES TEST RESISTANCE -- COMMODITY DROP CARRIES MIXED MESSAGE
S&P 500 STABILIZES NEAR DECEMBER LOW...A short-term oversold condition helps support stocks. The daily bars in Chart 1 show the S&P 500 bouncing off potential chart support at its December low. In addition, its 9-day RSI line in the upper box is bouncing off its oversold level near 30. Bank stocks which have plunged over the last week are also trying to stabilize from a short-term oversold condition. That's helping support a short-term rebound in small cap stocks which are heavily exposed to smaller bank stocks. Chart 2 shows Russell 2000 iShares (IWM) also starting to rebound off their December lows. Their 9-day RSI line is also in a deeply oversold condition. None of that erases the technical damage done to stocks over the past week which remain vulnerable to concerns about the banking system. But it does relieve some short-term pressure. Bonds have also reached some potential short-term resistance.
BOND PRICES STALL AT OVERHEAD RESISTANCE...The sharp drop in stock prices over the past week caused a huge flight to the safety of bond prices which rose as stocks fell. But bond prices may be stalling at some potential overhead resistance. The daily bars in Chart 3 show Treasury Bond iShares pulling back from potential resistance along its December/February highs and a short-term overbought condition. A pullback in bond prices would be consistent with a rebound in stock. prices. Bond yields which rise when bond prices fall are also starting to rebound. Chart 4 shows the 10-Year Treasury yield bouncing off potential chart support and its 200-day moving average. The sharp move in the bond market owing to the bank crisis may have been overdone over the short run. But the buying of bonds may also be reflecting growing concerns about the state of the economy. Which brings us to recent weakness in commodity markets.
COMMODITY SELLING HINTS AT ECONOMIC WEAKNESS... Another side-effect of the past week's rotation out of stocks and into bonds has been selling in commodity markets. The weekly bars in Chart 5 show the S&P GSCI Commodity Index falling to the lowest level since 2021. Falling oil prices were a big part of the commodity selling. As explained in previous messages, falling commodity prices carry good and bad news. The good news is that it suggests that inflation is starting to ease. Which helps explain why falling commodity prices are usually good for bonds. The bad news is that commodity weakness may also be a sign of a slowing economy which may also be good for bond prices. Which it's why it's a good idea to track the relationship between the two asset classes.
BOND/COMMODITY RATIO TURNS UP... Ratio analysis is the best way to compare two asset classes. Chart 6 shows a ratio of bond prices (TLT) divided by commodity prices rising over the last week to the highest level in a year. It's too soon to call that a major bottom. But it does suggest that the tide may be turning in favor of bonds over commodities. That's consistent with a weaker economy. And is usually bad for stocks as well. That may help explain the recent flight to the safety of Treasury bonds as stock and commodity prices fell.
