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business newsMessage of the Markets: Bonds and Stocks
The bond market is sending "risk off" messages while the stock market is sending "growth on" messages.
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The Message From Stocks:
I’ve been stating recently that the NASDAQ has been outperforming the S&P and that the domestic markets have been outperforming the international markets. Here is the evidence of both of those observations:
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The chart above shows the SPY, QQQ and the spread ratio of the two. Notice the deterioration in the technicals of the SPY (broken uptrend line and already testing the broken downtrend line support) versus the relatively good condition of the QQQ technicals (uptrend line intact and nowhere near the broken downtrend line). Notice also that the spread ratio is sporting a broken long-term uptrend line and a short-term downtrend that is firmly in place. Again, this is the SPY / QQQ ratio, so weakness here is actually a good sign for the bulls (they want leadership from technology / growth). So, this presents an interesting contrast to the bond markets – risk / growth is en vogue in the equity markets.
This chart shows QQQ versus the iShares Emerging Markets ETF (EEM) – also on a daily basis going back to last year. Notice that there is a long-term uptrend line firmly in place and an intermediate term downtrend line that was recently conquered – both bullish for the QQQ. However, we can also see that a very short-term uptrend line was violated – indicating that short-term weakness in the U.S. was beginning to rear its ugly head. Overall, the picutre for the QQQ / EEM ratio is long-term bullish (favoring U.S. large cap growth) but short-term neutral / weak (indicating that the U.S. may play catch up on the downside with international / emerging markets that have been lagging for a while now).
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Even if we establish that the NASDAQ is stronger than the S&P on a relative basis, does that mean it’s time to load up on the Qs? Of course not. The chart below shows the NASDAQ Composite Index on a daily basis going back to last year. Notice the red Fibonacci lines on the chart which give an initial target (if this is just a corrective move and not a new primary wave lower) of 2,723 or so (less than 2% from yesterday’s close). That level also corresponds with the 61.8% Fibonacci retracement of what I’m seeing as a third wave higher that occurred in June (see blue lines). There is some horizontal line support at the 2727 level as well (see green boxes). So, I’m thinking that we see a test of that level for sure in the next session or two. There’s obviously no guarantee that support holds there, but there should be some attempt by the bulls to make a stand at that level. For the nimblest of traders, a long-side trade in specific areas of the market may be worth a shot.
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Follow Tim Thielen on Twitter @tttechnalytics.
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