Bullish Trends Are Still Holding Up in Risk Assets for Now, but How About October?

By Tim Thielen  SEP 21, 2012 10:05 AM

It's time for risk assets to start building their strength into the end of the month/quarter, right? This week has been very ho-hum, but expect some better action in the next nine calendar days. After that, however, be careful!

 


MINYANVILLE ORIGINAL Get ready for the end of the marking period push – a rally in risk assets that may take stocks to new highs.  However, that should be followed by a more substantial correction lower in risk assets in October.  That would mean October will bring weak price action in stocks, gold, crude oil, and the risk currencies while Treasuries, the US dollar, the Japanese yen, and other “risk off” beneficiaries will show strong price action.  Of course, all that is contingent on me being correct in my call – a goal always strived for but not always attained.

MESSAGE OF THE MARKETS:

BONDS

Before we get into some new bond charts, let’s check in on our go-to charts of the yield on the 10-year Treasury Note ($TNX.X). 

Monthly charts say Treasury yields still have a bit more work to do on upside before resuming trek lower.

As pointed out here on Monday, I’m still of the opinion that Treasury yields need to move higher before they make yet another push to the downside.  The monthly chart below shows that they will work their way up to either 1.955% or 2.241% in all likelihood before the wave iv correction higher is over.


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The daily chart of the TNX still says "up, then down."

The daily chart shows how TNX has crept lower this week as stocks have come in a bit.  The fulfillment of the c wave projection of the abc correction would take TNX up to the 1.955% level – and even a bit beyond that.  A close above 1.978% will tell me that 2.241% (and possibly 2.473%) will be tested eventually during wave iv.  Wave v, when it occurs, should mean at least a test of the July lows in yield at 1.394%.  It would be hard to imagine rates falling back down to those levels while risk assets were rallying.  This is why I’m of the opinion that risk assets rally a bit further, then start to correct lower (while yields rally a bit further, then move back down to the lows). 
 

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Junk bonds have corrected a little & may drop some more – but uptrend still intact so far.

The high yield bond market has been a go-to play for many investors looking for a risk alternative other than equities.  The attraction is the obvious correlation to stocks but with the added bonus of a 6% or so yield.  The chart below of the SPDR Lehman High Yield Bond ETF (NYSEARCA:JNK) shows the nice run that took place from the beginning of June until just a few days ago.  It also shows a matching uptrend in the RSI for JNK.  It’s been pretty steady upside action for both price and the RSI with just a few days at a time of corrective action.  That’s where we may be right now – in another JNK mini-correction.  To me, as long as the uptrend line remains intact for JNK, the bull phase for risk assets should be considered intact. 


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Emerging markets bonds also still holding support – so far.

The other non-Treasury fixed income chart I like to monitor as a tell for what’s going on in the “risk on / risk off” fight is the iShares JPMorgan US Dollar Emerging Market Bond ETF (NYSEARCA:EMB).  I’ve featured here multiple times over the last year the fact that EMB has a pretty good support / resistance level from its 14-day moving average.  EMB did have a false breakdown below the average in August, but it quickly recaptured the average and made new highs.  Now, it looks like EMB has been moving a bit more sideways than higher over the last several sessions – which is actually pretty good compared to JNK for example.  The main thing upon which to focus, though, is the fact that EMB is still trading above the moving average support.  Until that breaks, the bulls can still hang their hat on this chart.


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CURRENCIES

Euro / US dollar has begun to correct as expected.  Now how much downside will we see?

I noted on Monday that I felt the EURUSD would correct lower after the very strong rally that it had from July to just a few days ago.  Well, the correction appears to have begun.  The question is how far will the correction go on the downside?  Based on the idea that the EURUSD will eventually retrace the entire wave (i) move, this downside in the short-term should take the cross low enough (for the b wave) so that the c wave of the larger wave (ii) will terminate no higher than 1.34855.  That would mean that wave b (the current move lower) should terminate all the way down at around 1.23802.  That seems like a pretty rough move to the downside, but all it’s doing is partially retracing the rally that just took place over the last 45 days.
 

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Risk guages like the EURJPY are correcting as well – and may have put in a lower high.

Some other risk guages that I follow are telling a little bit different story than the EURUSD – in terms of the bigger picture.  The EURJPY, for example, is also pointing to more downside in the short-term.  However, this cross appears to have put in a lower high (wave ii) and is in a new impulse wave lower (wave iii).  That is different than what we’re seeing with the EURUSD.  That’s OK, it’s just that we must realize that not all risk guages trade exactly the same way.  If and when EURUSD rallies for wave c as noted above, it will take out the wave “a” peak and make a new short-term high.  That will not be the case in all likelihod for EURJPY.  If I’m correct and this scenario plays out, it will provide us with a nice bearish divergence off of which we can strategize.  We’ll see…


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SUMMING UP

Look for the short-term moves that I’ve been anticipating – a bit more upside in risk assets heading into the end of the month / quarter.  Then, I am calling for a correction in risk assets in general and a rally in safety assets.  Who knows?  Maybe October will end up being a spooky month in terms of the risk on trade.   Maybe much of the spookiness will be occurring as the presidential debate season heats up and the societal acrimony that Mr. Todd Harrison frequently references heats up as well. 

Twitter: @tttechnalytics

No positions in stocks mentioned.

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