Category: Fixed Income

Treasury, municipal and corporate bonds

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S&P500 recovers as bond yields rise, but TSX weakens

10-Year Treasury yields respected support at 2.00%, confirming the primary up-trend. Only breakout above 4.00% would end the 31-year secular bear-trend, but a rise to there would result in an almost 50% loss for bondholders. Rising yields reflect market expectations that the economy will recover and the Fed will curtail further quantitative easing.

10-Year Treasury Yields

The S&P 500 respected support at 1600 and is headed for a test of the upper channel around 1700. Reversal below support at 1600 is now unlikely, but would warn of a correction.

S&P 500 Index
The VIX is rising, but remains in the green zone, below 20.

S&P 500 Index

The TSX Composite reversed below support at 12500, indicating weakness. Follow-through below last week’s low would suggest a test of primary support at 11900/12000. Bearish divergence on 13-week Twiggs Money Flow warns of selling pressure.

Nikkei 225 Index

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Nikkei, ASX find support but India & China weaken

Dow Jones Japan index found support at its long-term rising trendline.  Follow-through above 77 would indicate the correction is over, suggesting an advance to 100*. Breach of the trendline, however would warn that the primary trend is weakening.

Nikkei 225 Index

* Target calculation: 85 + ( 85 – 70 ) = 100

The ASX 200 also encountered buying pressure, with a hammer candlestick at the primary support level of 4900. Recovery above 5000 would indicate the correction is over, but breach remains as likely and would confirm the primary down-trend suggested by bearish divergence on 21-day Twiggs Money Flow.

ASX 200 Index

India’s Sensex is testing medium-term support at 19600. Breach would signal a correction to test primary support at 18000. Bearish divergence on 21-day Twiggs Money Flow warns of selling pressure. Recovery above 20000 is unlikely, but would suggest an advance to 22000*.

BSE Sensex Index

* Target calculation: 20 + ( 20 – 18 ) = 22

Dow Jones Shanghai Index broke its rising trendline, warning that the rally is running out of steam. Failure of support at 294 would signal another test of primary support at 275. Respect of support is unlikely, but would indicate a test of primary resistance at 314.

Shanghai Composite Index

The overall outlook for Asia remains bearish apart from Japan.

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Bearish signs for stocks

10-Year Treasury yields respected support at 2.05/2.10% with a key reversal (or outside reversal) on Friday, signaling a primary up-trend and possible test of 4.00% in the next few years. The tall shadow on Friday’s candle, however, warns of another test of the new support level before the trend gets under way. Only breakout above 4.00% would end the 31-year secular bear-trend.

10-Year Treasury Yields

The S&P 500 is headed for a test of the lower trend channel at 1600,  declining 21-day Twiggs Money Flow indicating medium-term selling pressure. Breach of support at 1600 would warn of a correction.

S&P 500 Index
The VIX is rising, but only breakout above 20 would indicate something is amiss.

S&P 500 Index

Japan’s Nikkei 225 Index ran into huge selling pressure, falling to 13400 by midday Monday. Expect a test of support at 11500, but the primary trend remains upward. Rising industrial production indicates that Abenomics is starting to take effect.

Nikkei 225 Index

The UK’s FTSE 100 also ran into selling pressure — at its 2007 high of 6750 — with bearish divergence on 13-week Twiggs Money Flow. Expect a correction to test 6000, but the primary trend remains upward.
FTSE 100 Index

Bearish divergence on the Shanghai Composite Index (21-day Twiggs Money Flow) indicates medium-term selling pressure. Expect another test of primary support at 2170. Penetration of the rising trendline would confirm. Breakout above 2460 would complete an inverted head and shoulders reversal (as indicated by orange + green arrows), signaling a primary up-trend, but that appears some way off.

Shanghai Composite Index

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Gold: Two elephants in a lifeboat

There are currently two players destabilizing global financial markets — like elephants in a lifeboat. One is the Bank of Japan, with markets uncertain as to how massive expansion of the monetary base will play out. The second is the Fed, where hints of a taper were enough to send the market into a panic, forcing the Fed to tone down its rhetoric. Emphasis now is on marginal rather than sizable decreases in QE.

Gold broke resistance at $1400, respecting primary support at $1320 and headed for another test of $1500. Uncertainty is high with the metal as likely to break resistance at $1500, signaling a primary up-trend, as to break primary support, which would offer a target of $1200*.

Spot Gold

* Target calculation: 1350 – ( 1500 – 1350 ) = 1200

Treasury Yields

Ten-year treasury yields broke resistance at 2.10%, signaling a primary up-trend. First, expect retracement to test the new support level at 2.00/2.05 percent. Breach of that level would warn of another test of primary support at 1.60%. I do not believe that rising yields indicate a resurgence of inflation expectations, but rather anticipation of the Fed taper of quantitative easing. No one wants to be left holding bonds when yields start rising.

Dollar Index

Crude Oil

Brent Crude is headed for another test of resistance at $106/barrel. Respect would indicate a down-swing to $92*, while failure would signal reversal to an up-trend. Nymex WTI respected resistance at $98 and is expected to re-test resistance at $85/barrel. A classic pair trade, the spread between the two is likely to narrow as the European economy under-performs.

Brent Crude and Nymex Crude

Commodities

Commodity prices continue to fall, with the Dow Jones/UBS Commodity Index headed for primary support at 125/126. But signs of a base forming on the Shanghai Composite Index are likely to lift commodity prices. A Shanghai breakout above 2500 or penetration of the declining trendline would indicate a test of 150 for $DUBS.

Dow Jones UBS Commodities Index

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Shanghai rising but Nikkei, ASX selling pressure

Germany’s DAX is retracing to test the new support level at 8000. Respect would confirm a primary advance, but bearish divergence on 13-week Twiggs Money Flow warns of selling pressure — a fall below zero would warn of a reversal. Breach of 8000 would test the rising trendline around 7500.
DAX Index

Dow Jones Europe encountered strong resistance at 290, but remains in a primary up-trend. Penetration of the rising trendline would warn that the trend is losing momentum, while failure of support at 270 would signal a reversal.

DJ Europe Index

The Nikkei 225 ran into massive selling between 15000 and 16000. The gravestone on the monthly chart, supported by bearish divergence on 13-week Twiggs Money Flow, warns of a reversal.

Nikkei 225 Index

India’s Sensex is headed for a test of long-term resistance at 21000, but bearish divergence on 13-week Twiggs Money Flow warns of selling pressure. Respect of resistance would indicate another test of primary support at 18000.

BSE Sensex Index

The Shanghai Composite Index respected support at 2150 and is headed for another test of resistance at 2500. Breakout above 2500 would complete an inverted head and shoulders reversal (as indicated by orange + green arrows), signaling a primary up-trend. That is still some way off but would be good news for Australia’s beleaguered resources stocks.

Shanghai Composite Index

The ASX 200 is headed for a test of primary support at 4900. Breach would also penetrate the rising trendline, indicating reversal to a primary down-trend. Bearish divergence on 13-week Twiggs Money Flow has been warning of strong selling pressure. The falling Aussie Dollar is forcing a retreat of offshore investors from the market, but the boost to export earnings is likely to present a buying opportunity for Australian investors when the correction is over.

ASX 200 Index

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China hints at bottom while S&P 500 reverses

10-Year Treasury yields are testing resistance at 2.05/2.10%. Breakout above 2.10% would signal a primary up-trend and possible test of 4.00% in the next few years. Only breakout above 4.00%, however, would end the 31-year secular bear-trend.

10-Year Treasury Yields

The S&P 500 completed a key reversal (or outside reversal), indicating selling pressure. Expect a test of the lower trend channel at 1600.

S&P 500 Index
There is no great movement in the VIX and this so far looks like a normal retracement. A June quarter-end below 1500 looks unlikely, but would present a long-term bear signal.

S&P 500 Index

The UK’s FTSE 100 Index is headed for a test of its year 2000 high at 7000. Expect a correction or consolidation below this level. Breakout remains doubtful but would signal a long-term primary advance.
FTSE 100 Index

Penetration of its descending trendline indicates correction on the Shanghai Composite Index has ended and we can expect another test of resistance at 2500. Breakout above 2500 would complete an inverted head and shoulders reversal (as indicated by orange + green arrows), signaling a primary up-trend. That would be good news for Australia’s beleaguered resources stocks.

Shanghai Composite Index

As traders we follow the trend, but in times like this it is important to remain vigilant.

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Market Insight: Central bankers turn deaf ear on balance sheets – FT.com

John Plender at FT observes:

The sheer size of the move in US Treasuries is striking. From the beginning of May to the end of last week, yields on the 30-year Treasury bond rose by nearly 40 basis points while the 10-year yield rose around 30bp. That is a measure of the market’s sensitivity to assumptions about an exit from the era of central bank balance sheet expansion. It is also an indication of how far we are from a return to normality.

Read more at Market Insight: Central bankers turn deaf ear on balance sheets – FT.com.

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VIX low S&P 500 high

The VIX CBOE Volatility Index is below 15%, indicating investor confidence.
VIX
But the risk premium on Baa-grade bonds (Moody’s lowest investment grade, compared to the 10-year Treasury yield) remains elevated. Corporate bond investors are still wary.
Baa Risk Premium
10-Year Treasury yields are headed for a test of resistance at 2.00%/2.10%. There is no sign of inflationary pressure, so outflow from Treasuries is more likely indicative of their extremely overbought position — with yields near record lows — and suggestions from FOMC minutes that quantitative easing may be scaled back later in the year. Breakout above 2.10% would signal a primary up-trend with an initial target of 2.40%.
10-Year Treasury Yields
The S&P 500 is advancing strongly. 6-Monthly Twiggs Money Flow rising strongly indicates a healthy primary up-trend. The index is overdue for a correction, but this is likely to be mild.

S&P 500 Index

* Target calculation: 1475 + ( 1475 – 1350 ) = 1600

Nasdaq 100 also signals a healthy up-trend, advancing towards a target of 3400*.
Nasdaq 100 Index

* Target calculation: 2900 + ( 2900 – 2500 ) = 3400

Bellwether transport stock Fedex respected support at $90. Recovery above $100 would confirm the primary up-trend is intact. A bullish sign for the economy.
Fedex

Follow the trend but keep an eye on risk measures like the VIX and Baa risk premium. These are uncertain times.

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Gold and commodities fall while Dollar and bond yields rise

Gold broke the rising trendline and support at $1440/$1450, indicating another test of primary support at $1320. Target of $1200* for the decline would be confirmed by a breach of primary support.

Spot Gold

* Target calculation: 1350 – ( 1500 – 1350 ) = 1200

Treasury Yields

Ten-year treasury yields broke resistance at 1.80% and are headed for a test of 2.00/2.05%. Breach of that level would signal a primary up-trend, but the thirty-year secular bear trend (in yields) remains downward and would only be reversed by a rise above 4.00%. Respect of resistance at 2.05% remains likely and would indicate another down-swing to test primary support at 1.60%. A weak inflation outlook, as indicated by falling gold prices, would decrease demand for stocks (as an inflation hedge) and increase demand for bonds.

Dollar Index

Dollar Index

The Dollar is strengthening, with the Dollar Index testing resistance at 84. Breakout would signal a test of long-term resistance at 89/90*.
Dollar Index

* Target calculation: 84 + ( 84 – 79 ) = 89

Crude Oil

Brent Crude respected resistance at $106/barrel, indicating a down-swing to $92*. Nymex WTI respected resistance at $98 and is likely to re-test resistance at $85/barrel. A classic pair trade, the spread between the two is likely to narrow as the European economy under-performs.

Brent Crude and Nymex Crude

Commodities

Commodity prices continue to fall, with the Dow Jones/UBS Commodity Index headed for primary support at 125/126. The major driver of commodity prices is China and reversal of the current down-trend, on both indices, appears some way off despite a US recovery.

Dow Jones UBS Commodities Index

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Gold rally falters, while bond yields rise

Gold’s bear rally has run out of steam, with continued tests of support at $1440/$1450. Breach would penetrate the rising trendline, indicating another test of primary support at $1320. Target for the decline would be $1200*. Breakout above $1500 is unlikely, but would test $1550.

Spot Gold

* Target calculation: 1350 – ( 1500 – 1350 ) = 1200

The Gold Bugs Index, representing un-hedged gold stocks, behaves like a leveraged gold instrument. So far there is no sign of a bounce. Breach of support at 260 would warn of another decline.
Gold Bugs Index
My bullish outlook for gold is fading in the face of stubborn deflationary pressures faced by central banks.

Treasury Yields

Ten-year treasury yields rallied sharply at the end of last week and are now testing resistance at 1.80%. Respect of resistance remains likely — after all this is a down-trend — and would suggest another test of the all-time low at 1.40%. Breakout above 1.80% would signal a test of resistance at 2.00/2.05%, while breach of that level would signal a primary up-trend. The thirty year secular bear trend (in yields) remains downward and would only be reversed by a rise above 4.00%.

Dollar Index

Crude Oil

Brent Crude is testing its former support level at $106/barrel. Respect is likely and would offer a target of $92*. Nymex WTI broke out of its trend channel, but the trend remains downward until resistance at $98 is broken. A classic pair trade, the spread between the two is likely to narrow as the European economy under-performs.

Brent Crude and Nymex Crude

Commodities

Commodity prices continue to diverge from stocks, with the S&P 500 advancing while Dow Jones – UBS Commodity Index is headed for primary support at 125.

Dow Jones UBS Commodities Index

Reason for the disconnect is evident on the next chart. Demand from China has been driving commodities for most of the last decade. A slowing Chinese economy more than offset rising demand from the USA.

Dow Jones UBS Commodities Index

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