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Stocks Continue to Ignore Warning Signs From Bonds, Currencies


The euro currencies are continuing their slide, and both the Treasury and high-yield bond markets are sending warning signals as well.


Bearish messages continue to come from the currency and bond markets even as the stock market continues to drift higher. As always, I will choose to pay more attention to the messages from the bond and currency markets. However, as I will show in this week's report, there may be some tweaking needed in terms of which currency crosses we must monitor (given the very specific problems that the euro currency faces).

Message of the Markets


10-Year T-Note Update

  • This chart of the 10-Year T-Note Yield ($TNX.X) shows that yields stopped right at the 61.8% Fibonacci price projection line last week and faltered into the weekend.
  • Right now, stock investors want to see yields move higher as that would indicate that money is flowing out of bonds and into stocks.
  • Typically, a corrective move will either be a flat correction or a zigzag correction of some kind. Also, typically, a zigzag correction would be a nice symmetrical "abc" formation with the end point of the correction occurring at or near the 100% Fibonacci price projection line.
  • So, while there is certainly room to the upside for rates (up to the 100% line at 2.093%), there is also the possibility that the 61.8% line will act as the ceiling for this corrective move higher.
  • For me, a move below 1.857% in rates on the 10-year will be bullish for Treasuries and bearish for risk assets.
Another sign that money ran from risk this past week – witness the action in JNK.

  • The chart of the iShares High Yield Bond ETF (JNK) shows us another instance where the corrective move higher – presumably an "abc" correction – stopped at the 61.8% Fibonacci projection line.
  • Will that level act as the ceiling for this upside correction? Or, will there be one more push to the upside for JNK up to the 100% Fibonacci line at $39.67?
  • Again, I'm going to have to refrain from prognosticating and just "lay it out so they can play it out."

The euro / yen currency cross is still sending danger signals.

  • The chart above of the euro / yen currency cross (EURJPY) shows that there may be even more downside ahead – not only for this cross, but possibly for risk assets. I would note, however, that I'm beginning to think (given the euro's very specific problems) that we should be looking at another cross (perhaps the Aussie dollar / Japanese yen cross) instead as our go-to guage for global risk appetite.
The euro / US dollar is also trading awfully.

  • Meanwhile, the euro / US dollar cross is continuing to flounder. The weekly chart above shows that it appears to be in the midst of wave (iii) of iii of 3 lower (the dreaded third of a third of a third wave with massive thrust potential).
  • The downside targets for this move come in at 1.25579 and 1.22854. Again, what the continued euro weakness means to global risk assets going forward remains a question. Up to this point, it hasn't been very friendly to risk assets, though. Will there be a decoupling of that relationship? Only time will tell.
The Aussie dollar / Japanese yen cross may be a better gauge of the global appetite for risk now.

  • I show you the above chart of the Aussie dollar / Japanese yen currency cross (AUDJPY) so that you can see that other measures of the global appetite for risk are not nearly as bearish as the euro / yen cross.
  • I think it may be time to set aside the EURJPY as the primary measure of risk appetite in the currency markets. The euro has its own problems and probably should not be used as the go-to guage any more – in my opinion.
  • The message from the chart above is mixed at this point. The AUDJPY appears to be in wave (b) of b of 4. There should be some more upside before wave (b) is finished – which may mean a bit more upside for risk assets. However, the cross is in the middle of no-man's-land where neither the bulls or the bears have any clear edge. This fits right in with where stocks appear to be at this point – they're vulnerable, but continue to lift higher.
Something's gotta give soon. Either the bond and currency markets will start to change directions in a big way or stocks will (meaning they'll head convincingly lower). That change – whether it is in stocks or in the bond and currency markets – doesn't have to happen today or this week, but it will be sooner than later in my opinion.

Twitter: @tttechnalytics

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