I had to put this chart up. No comment is necessary…..
Sweet trade Rupe
I had to put this chart up. No comment is necessary…..
Sweet trade Rupe
Its been one hell of a week if you’re long stocks, but now its now 4th of July Weekend. Historically volume dries up big time, especially the Friday before the holiday. Performance wise, the numbers are mixed but leaning a little towards the bears camp. From the Stock Traders Almanac:
Trading on the day before and after the Independence Day holiday is often lackluster. Volume tends to decline on either side of the holiday as vacations begin early and finish late. Since 1980, DJIA, S&P 500, NASDAQ, and Russell 2000 have recorded average losses on the day before and the day after. In 2011, the first trading day of July is also the day before. A bullish bias on July 1 could mitigate the otherwise bearish day before tendencies, but it also offer traders an opportunity to lock in profits from the last four sessions before heading out on a long weekend.
With Treasury Bonds getting clobbered over the last week, yields have been on fire. This morning, $TNX broke through the 50 and 200 day moving averages like they weren’t even there. Trouble is now approaching around this $32 level. The market has memory here from key support in March as well as all of the churning that took place here throughout the month of May. The 38.2% Fibonacci Retracement from the February Highs to recent lows also comes into play at these levels.
I would not be surprised to see a little consolidation around here to allow the 50 day to turn around and head higher. Two positives here for Treasury Yields are the fact that the longer term 200 day moving average is already upward-sloping and a Bullish Divergence in RSI throughout June originally sparked this rally. The S&P500 has been positively correlated with yields, so if you’re trading stocks, you definitely want to watch both the price of the bonds and their yields.
Bespoke Investment Group knocks the cover off the ball with this one:
From Bespoke – The market has had a great 3-day run. In fact, this is the first time the S&P 500 has had three consecutive days of gains of 0.75% or more since last September. But as we noted in our prior post, the S&P is still below its 50-day moving average. As shown below, only 45% of stocks in the index are currently trading above their 50-day moving averages. So while we’ve bounced significantly this week, the market still has a long way to go before it becomes overbought. If you’re a bull and missed this week’s run, there’s still time to get in without doing so at over-extended levels.
Peter Brandt thinks Silver is headed to $20 (PeterLBrandt)
Opening Heaven’s Copper Door (chessNwine)
Yield Curves: 10-Year, AAA, BAA (WorldBeta)
Greg Harmon: Macro Economic Clues Through Metals Charts (DragonflyCapital)
The Cost of Reducing Government Debt (Economist)
Housing Charts: Existing Home Inventory (CalculatedRisk)
Sam Stovall Talks Markets: Look for High Div Yield in Consumer Staples & Industrials (MSNBC)
What About Those Levels (DerekHernquist)
Traders & Investors: Trying to Improve your Quarterback Rating (T3Live)
Hot Julys and Summer Rallies (StockTradersAlmanac)
2011 Is Looking A Lot Like…. (Bespoke)
Average Minutes Per Visitor: Google vs Facebook (Silicon Alley Insider)
As we’ve been discussing here for the last month, Treasury Bonds and Stocks have been trading inversely to one another for years now. The big question last time we addressed this was whether Bonds would find resistance at this multi-year downtrend line or breakout and cause havoc in the stock market? Here is what it’s looking like today:
This inverse correlation between stocks and bonds has been very consistent. The 12% rally that we just saw in bonds, however, only brought the market down 8% from the peak and just 6.5% from the February highs that kicked off the 2011 bond rally. A question we had last time we discussed this issue was whether bonds were warning us of something bigger for stocks, or whether the relative performance of the Stock Market was a sign of strength. In other words, without a big drawdown in the stock market, was the upcoming stock market rally going to start from a higher point?
These are all questions that we are trying to answer right now. Look at how powerful this stock market rally has been with Treasuries having just three bad days. If $TLT continues to sell-off, this bodes very well for US Equities. Look at how RSI has been rolling over as $TLT fails to breakout to new highs:
This is a chart we want to watch folks. Most of my readers have equities in their portfolios. I manage equities for clients. If we’re not watching Treasury Bonds, I think we’re missing out on some solid information. From a risk management point of view, we clearly want to keep an eye on the recent highs for $TLT. If last week’s highs are taken out and you start to see 98 on $TLT, then stocks are probably in bigger trouble than we think. Meanwhile, we also want to keep an eye on the recent support levels on the S&P500. These two breaks would probably occur within a couple of days of each other and all bullish bets would be off.
This is all positive for stocks, while bearish for Bonds. These levels hold, and we’re going to have a nice little stock market rally in July.
*** Updated at 6:30PM ***
When I put the chart up this morning we discussed major resistance at current levels that needed to clear before getting too excited. Well that didn’t take long at all. I’m pretty excited about owning US equities here. This is a ratio that I don’t hear people discussing very often so maybe that’s why I use it as much as I do. As long as the $XLY:$XLP ratio can hang on to these breakout levels without rolling over, I think a nice July rally is in the cards. As discussed on a June 22 post, the major averages held on to their 200 day Moving averages so this is what we want to watch as a risk management tool throughout the rest of the summer.
Here is the updated chart:
Here is an updated look at our favorite risk-on/risk-off ratio: Consumer Discretionaries vs Consumer Staples ($XLY:$XLP):
This ratio has quietly been rallying hard over the last couple of weeks. Currently we’re testing key resistance from the top of this downtrend channel as well as the 200 day moving average. The fact that the slope of the 200 day is up is certainly a positive. On June 20th we saw a key reversal day that could have been the last shake out necessary to get this thing going.
As we know from our April 11th $XLY:$XLP post, this ratio is very highly correlated with the S&P500. When the Stock Market is rallying, Discretionaries tend to outperform Staples. The opposite of this is also true. Since this ratio broke down in April and May, the stock market has not been able to catch a bid. It has been a brutal equities market, until just recently when this ratio began to rally.
We want to see a clear breakout from this trend channel before getting excited. Another factor to watch here is RSI. This oscillator broke out through 3 month resistance and is now trying to get up towards an overbought level. We know from experience that when RSI gets to overbought levels, there is clear evidence of buying, and this is a good thing.
Let’s revisit this ratio soon once we know the results of this test of resistance. Happy Trading.
TraderMark has a great post up today at FundMyMutualFund about the S&P500 being stuck in a “box” for over three weeks.
“Roughly S&P 1260 on the bottom and upper 1290s on the top. Bears can claim that the market is working off an oversold state by churning, rather than rebounding. Bulls can claim the 200 day moving average is holding. So a little something for everyone. Usually the longer the market goes sideways, the more powerful the ensuing move. But there is little to get excited about right now until we break out one way or the other. Until that point selling/shorting at the top of the box, and buying/covering at the bottom has been the no brainer trade.”
This trade worked again today as the S&P500 rallied off the 1267 lows from Friday’s decline. He makes the point that the longer the sideways consolidation, the more powerful the ensuing move. I will be looking for a break of either support or resistance to signal the direction of the markets going forward.
Chasing Our Tail: 16th Day in this “Box” (FundMyMutualFund)