Category: US & Canada

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Falling Treasury yields: Money is flowing out of stocks

10-Year Treasury yields broke medium-term support at 1.55 percent, indicating another decline. Breach of support at 1.45 percent would confirm, offering a target of 1.20 percent*. Latest stats from the Fed show holdings of Treasury notes and bonds fell over the last week, so the fall is not due to “Operation Twist”. Declining yields suggest that the current stock market rally is likely to fail: money is flowing out of stocks and into bonds. Recovery above 1.70 percent is unlikely but would suggest another stock market rally.

10-Year Treasury Yields

* Target calculation: 1.45 – ( 1.70 – 1.45 ) = 1.20

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The Threat From a Recession | ECRI

The Economic Cycle Research Institute, which claims a perfect recession-forecasting record, says an economic contraction is imminent. “We have not seen a slowdown where year-over-year payroll job growth has dropped this low without a recession,” ECRI states in a May report.

If, or when, the U.S. (and/or the global) economy does start to contract, commodity prices will tumble because of three factors…..

via The Threat From a Recession | News | News and Events | ECRI.

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Economists React: How Likely Is QE3 Following Jobs Data? – WSJ

CAPITAL ECONOMICS: QE3 will depend on second-quarter GDP and July’s ISM data because the jobs report was not bad enough to make QE3 “a done deal.” Both GDP and ISM numbers will be released just ahead of the Fed’s next policy meeting.

via Economists React: How Likely Is QE3 Following Jobs Data? – Real Time Economics – WSJ.

Comment:~ The range of opinion canvassed by WSJ leans toward the Fed holding off QE3 for the present because jobs numbers aren’t bad enough to warrant drastic intervention. In the long run QE appears inevitable — and not only in the US. There are three options: (1) stagnation with low growth and high unemployment; (2) debt-deflation as in 2009; and (3) inflation. Option (3) would reduce the public debt load by raising nominal GDP and rescue underwater homeowners and banks by lifting real estate values. Those on fixed incomes would suffer but they do not appear a powerful enough lobby to deter politicians from this course.

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Forex: Euro, Pound Sterling, Canadian Loonie, Australian Dollar, Japanese Yen and South African Rand

The Euro broke support at $1.25 before falling sharply through $1.24, warning of another decline. Narrow consolidation below the new resistance level is a bearish sign. Follow-through below $1.23 would offer a target of $1.20.

Euro/USD

Pound Sterling broke resistance at €1.25 against the Euro, offering a target of €1.28.

Pound Sterling/Euro

* Target calculation: 1.250 + ( 1.250 – 1.215 ) = 1.285

Canada’s Loonie is strengthening against the US Dollar on the back of rising oil prices. Expect another test of $1.02.

Canadian Loonie/US Dollar

The Aussie Dollar threatens to break down from its recent flag formation. Failure of support at $1.025 would suggest a test of $1.01.

Aussie Dollar/USD

The Aussie Dollar continues to range between ¥72 and ¥90 Japanese Yen. Dips are getting shorter and range traders may need to move their base to ¥75.

Aussie Dollar/Japanese Yen

Against the South African Rand, the Aussie Dollar is testing resistance at R8.50. Breakout would offer a target of R9.00. Narrow consolidation above R8.30 would be a bullish sign.

Aussie Dollar/South African Rand

* Target calculation: 8.50 + ( 8.50 – 8.00 ) = 9.00

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Treasury yields fall

10-Year Treasury yields are testing support at 1.55 percent. Falling yields suggest that the current stock market rally is likely to fail: money is flowing into bonds — not stocks. Failure of support would strengthen the warning. Recovery above 1.70 percent is less likely but would bolster the stock market rally.

Index

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Canada: TSX 60

Canada’s TSX 60 index is headed for a test of medium-term resistance at 675. Breakout would also breach of the descending trendline, warning that the correction is over. Rising 21-day Twiggs Money Flow reflects medium-term buying pressure.

TSX 60 Index

* Target calculation: 680 + ( 680 – 640 ) = 720

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US: Wait for Nasdaq confirmation

The S&P 500 closed above medium-term resistance at 1360. I am normally wary of quarter-end prices moves as fund managers have a vested interest in boosting their performance bonuses. But the breakout appears to have a legitimate basis, with Germany’s key concessions at the Euro summit, and should test the 2012 high of 1420. 63-Day Twiggs Momentum holding above zero suggests the primary trend is intact. Reversal below the new support level (1360), however, would indicate a false signal. Falling 10-year treasury yields warn of another flight to safety (unless the Fed is driving down yields through its “Twist” operations) and we need to exercise caution.

S&P 500 Index

* Target calculation: 1360 + ( 1360 – 1300 ) = 1420

Wait for the Nasdaq 100 to break resistance at 2630 and confirm the S&P signal. Rising 21-day Twiggs Money Flow indicates medium-term buying pressure.

Nasdaq 100 Index

* Target calculation: 2650 + ( 2650 – 2500 ) = 2800

Bellwether transport stock Fedex (weekly chart) completed a double top reversal in April but since then has oscillated around the former neckline at $88. 63-Day Twiggs Momentum also recovered above zero. Follow-through above $92 would suggest that the correction is over and broader economic activity is recovering. Reversal below $85 is unlikely but would warn of a primary down-trend.

Fedex weekly

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Stocks Out of Fashion Amid a Bonding With Bonds – WSJ.com

Since the start of 2007, a cumulative $350 billion has flowed out of stock funds and a little over $1 trillion has moved into bond funds….. In 2011, 45% was in stock funds and 25% in bonds; in 2005, the mix was 55% for stocks and 15% in bonds…..

via AHEAD OF THE TAPE: Stocks Out of Fashion Amid a Bonding With Bonds – WSJ.com.

Comment:~ Low bond yields and higher risk premiums on stocks (stock earnings yield minus bond yield) highlight investors flight to safety. But this is no guarantee that bonds will continue to out-perform stocks. Bond yields must be close to hitting a “floor” and, with no further capital gains, investor returns will be meagre — while stocks grow increasingly attractive.

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Forex: Euro, Pound Sterling, Australian Dollar and Canadian Loonie

The Euro retreated below support at $1.26, indicating a test of the 2010 low at $1.19/1.20. Breach of the rising trendline on 63-day Twiggs Momentum would strengthen the bear signal.

Euro/USD

Pound Sterling is testing resistance at $1.58 against the greenback. Respect would indicate  another test of primary support at $1.52. A 63-day Twiggs Momentum peak below zero would warn of a primary down-trend.

Pound Sterling/USD

* Target calculation: 1.53 – ( 1.63 – 1.53 ) = 1.43

Against the Euro, Pound Sterling is in an accelerating up-trend. The gap between the recent low at €1.225  and the previous peak at €1.215 suggests strong buying pressure — as does 63-day Twiggs Momentum oscillating high above zero.

Pound Sterling/Euro

* Target calculation: 1.250 + ( 1.250 – 1.215 ) = 1.285

Canada’s Loonie is strengthening against the Aussie Dollar. Long-term bullish divergence on 63-day Twiggs Momentum warns of reversal to a primary up-trend. Breakout above parity would confirm.

Canadian Loonie/Aussie Dollar

* Target calculation: 1.00 + ( 1.00 – 0.96 ) = 1.04

Short retracement suggests that the Aussie Dollar is, in turn, strengthening against the greenback on the Daily chart. Breakout above $1.02 (and the descending trendline) would indicate that a bottom is forming. Recovery of 63-day Twiggs Momentum above zero would suggest a primary up-trend.

Aussie Dollar/USD

* Target calculation: 1.02 + ( 1.02 – 1.00 ) = 1.04

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US and Canada: bull trap?

The S&P 500 retracement breached support at 1330, indicating a false breakout. Reversal of 21-day Twiggs Money Flow below zero would warn of a bull trap, while breach of support at 1270 would confirm another decline — with a target of 1160*.

S&P 500 Index

* Target calculation: 1260 – ( 1360 – 1260 ) = 1160

Nasdaq 100 monthly chart shows an intact up-trend despite slowing momentum. Respect of support at 2400 (and the zero line by 63-day Twiggs Momentum) would indicate another primary advance.  Penetration of the rising trendline, however, would warn that a top is forming.

Nasdaq 100 Index

* Target calculation: 2800 + ( 2800 – 2400 ) = 3200

Canada’s TSX 60 shows similar weakness, on the daily chart, to the S&P 500. Rising 21-day Twiggs Money Flow, however, indicates support at 640. Respect would suggest that a bottom is forming — strengthened if the index recovers above the declining trendline. Breach of support, on the other hand, would signal a decline to 600*.

TSX 60 Index

* Target calculation: 640 – ( 680 – 640 ) = 600

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