by Tom Aspray
Last week’s stock-market rally helped to erase the month’s sharp early losses, but probably made it more difficult for bondholders. The sharp drop in the last 15 minutes of trading on Friday did erase a good part of the week’s gains.
Importantly, mortgage rates jumped the most in over 26 years last week. While they are still at historically low levels, bondholders and the largest bond-fund managers remain nervous.
Last week started off with another jolt, as overnight lending rates in China spiked to well over 10% in an effort to clamp down on their hidden banking system. The chart reveals that this was a breakout from a yearlong trading range (line a).
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This action was in response to the high-risk activity of some banks, in what some have referred to as a “Ponzi scheme.” So it was not surprising that the Shanghai Composite plunged back to the late 2012 lows (line a), as it was down over 15% in June.
Many of the top bond managers have had a rough month. Up through last Monday, Pimco’s $285.2 billion Total Return Bond Fund (PTTAX) was down 3.8% for the month. But quite a few other bond funds actually did worse. In May, $1.32 billion flowed out of Pimco’s flagship fund, and early reports suggest these outflows have tripled in June.
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Pimco was not alone: in the week ending June 26, a staggering $23.3 billion was pulled out of a wide gamut of bond funds, including emerging market, mortgage backed, high yield and investment grade.
In a January 18 column, I warned not to buy the junk. Since then, the SPDR Barclays High-Yield Bond (JNK) is down 4.5%.
So what is a bondholder to do in this environment? The completion of the weekly reverse head-and-shoulders bottom formation in T-Bond yields at the end of May has an “upside target at 4%.” The yield is currently at 3.49%, but well below the week’s high.
The weekly yield chart below illustrates that from a technical perspective, yields have risen too far, too fast. Rates are still close to the weekly Starc+ band. This makes a pullback to the 3.29% to 3.40% area likely over the next several weeks. This target level is highlighted on the chart by the yellow box.
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This view is also consistent with the analysis of T-Note Futures, which violated important support (line b) two weeks ago. The futures dropped well below their Starc- band last week, before firming late in the week.
T-Notes are likely to rebound or at least move sideways in the coming weeks. The OBV did break key support at line c, so a rebound is likely to be followed by a further decline in T- Note prices.
Therefore, the rally in yields looks ready to fizzle in the coming weeks…but then probabilities favor a resumption of the uptrend in yields and even lower bond prices. The 30-year T-bond yield may not reach its 4% target until next year.
It has been a rough month for many of the markets, with selling especially heavy in the past few weeks. Gold is down more than $180 per ounce, so is not surprising that gold is the worst-performing asset class for the year, down over 26%.
Stocks have clearly been the only place to be. The Spyder Trust (SPY) is still up over 12% for the year. Next to stocks, bonds are the second-best performer of the four asset classes. TLT is down 8.8%, while the emerging markets, as represented by Vanguard FTSE Emerging Markets (VWO) is down 12.9% so far in 2013.
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If the US economy is going to get stronger as the year progresses, which is my view, then it would be surprising if all of the emerging-market economies got worse. The outflows in June from emerging markets (see chart) were the highest since January 2008.
The chart of VWO shows that it is testing its weekly Starc- band, with next important support in the $34 area (line a). The OBV has turned lower from resistance (line b) and has dropped below its WMA. I continue to think there will be some more opportunities in the emerging markets this year, as we did well with some of them in the first quarter.
Overall, the economic data was quite positive last week, and helped support the stock market. Early in the week, the Dallas Fed Manufacturing Survey beat expectations, as did numbers on durable goods, new home sales and consumer confidence. All show quite positive trends from a technical perspective.
The S&P Case-Shiller chart also shows a very strong uptrend. It previously gave a great sell signal in 2006 when it broke a 14-year uptrend.
The GDP was revised downward, and the Chicago PMI was lower than expected. Pending home sales remained strong, as did the University of Michigan’s Consumer Sentiment Index on Friday.
We will get a further look at manufacturing activity on Monday, with the PMI and ISM Manufacturing indexes. Also on Monday, we’ll see the latest data on construction spending, followed Tuesday by factory orders.
Just before the Fourth of July holiday, the ADP Employment Report and the ISM Non-Manufacturing Index will be released. And on Friday we get the monthly jobs report. Since the markets will be thin, the volatility may be quite high.
What to Watch
As I noted last week, the daily technical studies were negative. But the market was getting quite oversold, which made a rebound likely last week. The rally was quite impressive, and though prices just reached the expected upside targets, the internals did act better.
The daily studies improved to slightly positive after Thursday’s close, but as I tweeted before Friday’s opening, the market was ready for a pullback, or at least a pause.
It is now looking more likely that the lows from June 25 will hold. It will take a sharp down day with very negative market internals to reverse the improvement.
The seasonal pattern is a bit more positive for July and August, but then September is generally a problem.
The market did get oversold enough on the recent drop to support the resumption of the uptrend, as the number of NYSE stocks above their 50-day MAs dropped below 28 last week and has now risen to 40. In November 2012 it dropped below 22, and at the June lows was at 13 (see arrows below).
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As expected, sentiment numbers did turn a bit less bullish last week. Only 30% of individual investors are bullish according to AAII, down from 37.4%. Still, only 35% are bearish, and it would be good to see these numbers at more extreme levels.
The number of bullish financial newsletter writers also dropped from 46.8% to 41.7%, but at 25%, the number of bears is still quite low.
The number of new NYSE 52-week lows spiked to 546, which was a new high for the correction. The number of stocks making new highs still shows a pattern of lower highs.
The daily chart of the NYSE Composite shows that the former uptrend (line a) was tested on last week’s rally, and it was not able to move above the 20-day EMA at 9,188. First support is in the 8,900 to 9,000 area, and the correction has held above the 38.2% Fibonacci support at 8,757.
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The McClellan oscillator does show a pattern of higher highs (line b) and moved above the zero line late last week. As I discussed in last week’s Trading Lesson, this bullish divergence is consistent with a market low, but it needs to be confirmed by the A/D line.
The daily NYSE Advance/Decline line has moved back above its downtrend (line c) and its WMA. A pullback and then a move above last week’s high would complete the bottom formation. For July, the monthly pivot is at 9,143, with stronger resistance at 9,255 and then 9,412.
S&P 500
The daily chart of the Spyder Trust (SPY) shows a similar formation as the NYSE Composite, but the 20-day EMA, now at $161.75, was tested.
The July pivot is at $161.50, with further resistance at $162.90. The daily Starc+ band is at $164.18, and a close back above $166.04 would confirm that the correction is over.
The daily OBV was not impressive on the recent rally, as it appears to have stalled well below the declining WMA and the former uptrend (line f). It needs to overcome the resistance (line e) to turn positive.
The S&P 500 A/D line moved through resistance (line g), so the extent of any pullback will be important. The A/D line did form lower lows (line h), but acted stronger than prices.
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Dow Industrials
The SPDR Diamond Trust (DIA) moved above its 20-day EMA last Thursday, and then Friday’s decline closed below it. There is further resistance at $150.94 and then at $153.10.
There is initial support at $147.80, followed by the converging support (lines a and b). More important levels surround the doji low of $145.17. DIA did trigger a HCD last Tuesday.
The daily Dow Industrials A/D line is testing resistance now, and a strong breakout would be a very positive sign. The uptrend in the A/D line was tested last week.
Nasdaq-100
The PowerShares QQQ Trust (QQQ) was hit the hardest after the Bernanke comments. The 38.2% support at $69.73 was violated all the way down to a low of $69.15, which was just below our stop. Then, the rebound stalled below the still-declining 20-day EMA at $71.85. The daily downtrend (line d) sits at $73.27.
The Nasdaq-100 A/D line just slightly broke its long-term uptrend (line g) before turning higher. The downtrend (line f) was broken on last week’s rally, which is a positive sign. The A/D line should hold above its WMA on a pullback.
There is initial support now at $70.65, and then further levels at $69.81.
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