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Bonds and Currencies Still Not On Board With Stock Market Rally


Bearish messages continue to be sent from many parts of the global fixed income and currency arenas.


As always, my overall goal with my regular articles on fixed income and currencies is to provide some perspective on whether those two very large, liquid arenas are in agreement with the movements of the equity markets – in addition to pointing out some general areas of strength or weakness in those arenas off of which you can formulate some specific trades. For a while now, the caution signals emanating from the bond and currency arenas have largely been ignored by the equity markets. That, in my opinion, won't last much longer. Either stocks will reverse lower or bonds and currencies will start chiming in on the bullish side of things.

For a while now, the caution signals emanating from the bond and currency arenas have largely been ignored by the equity markets. That, in my opinion, won't last much longer. Either stocks will reverse lower or bonds and currencies will start chiming in on the bullish side of things.

Before we jump into what's going on in bonds and currencies, let's take a look at where we stand on the S&P 500 (INDEXSP:.INX) chart.

STOCKS – Day 1 of April and Still No Serious Selling

Here's a recap of what I saw on Monday (April 1):

We saw some selling pressure yesterday morning – for the first time in quite a while. However, after bottoming in the early afternoon, most equity groups spent the afternoon oscillating higher, lower, and higher again into the close. At the end of the day, we saw very modest losses in the US large cap indices with heavier losses in the rest of the groups – with the worst damage coming in US small and micro-caps as well as in international "core."

The levels to watch will be the mid-afternoon highs from Monday. If those peaks don't hold up as resistance, we could very well see a resumption in the upside bias for equities. How high do I think they'll go? Let's take a look at the S&P chart next.

S&P 500 (Cash):

The S&P closed March out above the previous monthly closing high of 1,563 and change – another win for the bulls out there. However, I would note that the intraday high from 2007 (1,576.09) still stands as obvious resistance (but everyone in the world knows / sees that). What most don't see or at least talk about is that there is projected resistance that comes into play at 1,578.48. That price level would make wave "v" roughly match wave "i" in magnitude AND would make wave "(v)" roughly match wave "(i)" in magnitude as well (see the labeling on the chart). If I see a close in the S&P above 1,578.48, I will honestly be shocked and will have to go back to the drawing board to re-evaluate where things may be headed moving forward.

Unless and until such a breakout happens, though, my most bullish scenario calls for a "normal" corrective pullback to the 1,343 – 1,474.51 range (a 7% - 15% decline, also the previous macro move's fourth wave). The more bearish scenario would have the S&P falling much further than that eventually (with stops along the way, obviously). So, let's see how things play out this week – as I believe we'll see the next big move lower or higher start soon.

Notes: Notice the lower high in RSI even as the price is rising (bearish divergence); also, note the weakening ADX reading (indicating weak momentum during the most recent upside).

OVERALL FOR STOCKS: We're at the proverbial fork in the road that I've been mentioning. Either stocks explode higher from here (confirming the breakouts that already took place in the S&P 500 futures, the Dow Industrials (INDEXDJX:.DJI), and US mid, small and micro caps) or they pull back fairly intensely (confirming the crummy action in international equities, copper futures currencies and bonds). The upside if the breakout occurs could be in the mid-1,700s on the S&P while the downside if the breakdown occurs will be at least to the 1,475 level.

BONDS – Still Not Confirming the Upside in Stocks

Treasury yields are doing the opposite of what the bulls would want them to do.

Treasury yields have been declining conspicuously recently – even as stocks have rallied. This is a divergence that won't last. Either rates will turn and move sharply higher (confirming the up move in stocks) or stocks will turn and move sharply lower (confirming the bearish messages we're seeing from declining yields). Right now, any bounce in yields (if it occurs) should top out at either 1.97% or at previous highs at 2.08 or so.

Emerging market debt continues to trade as if there are real problems in the key emerging market component countries.

The iShares Emerging Markets Bond ETF (NYSEARCA:EMB) is setting new lows almost every day now. This is a clear "risk off" message that is being ignored on a macro basis – even if it's keeping money out of emerging market equities. EMB could bounce once it hits projected support at $116.73, though.

US high yield bonds are rolling over and appear to have some more downside ahead.

I'm seeing about 2% of room to the downside to projected "correction support" for SPDR Barclays Capital High Yield Bnd ETF
(NYSEARCA:JNK). The chart looks bearish in the short-term, though (which means, of course, that it's signaling "risk off" as well).

OVERALL FOR BONDS: It's still a "risk off" warning that I'm seeing in bond land.

CURRENCIES – Mixed Messages in Currencies for the First Time in a While

The euro has been awful recently, but is too close to support to be aggressively bearish.

Bounces in a bear market do occur! Euro futures will almost certainly head lower at some point, but a little upside in the near term is certainly possible if not likely. Any of three upside resistance levels (outlined on the chart below) will be the stopping point for this rally attempt. Overall for the euro, it's short-term bullish / intermediate to longer-term bearish.

Aussie nearing highs again – long-term chart could be indicating strong upside to come.

I've been noticing some nice strength in the Aussie dollar futures chart recently and decided to take a bigger picture look at the Aussie. The monthly chart below (and the way it is labeled) suggests that the Aussie dollar could be on the verge of a substantial upside breakout. If it occurs, the breakout would actually be doubly significant as it would be a breakout from a long-term pennant formation and it would be a breakout above the 100% Fibonacci price projection line. I would consider an close above 1.0495 on the Aussie futures the breakout signal.

Canadian dollar nowhere near as bullish as the Aussie dollar.

The Canadian dollar is trading just under key "correction resistance" at 0.9845. Even if it breaks that level of resistance, though, it still needs to work to conquer the broken uptrend line resistance just above that level. Overall, it's not a bullish picture for the Canadian dollar.

Greenback pulling back short-term, but should move higher once this correction is over.

The US dollar is pulling back (as the euro bounces), but this should just be a corrective move lower. Once this correction runs its course, the major trend action (higher in the greenback and lower in the euro) should resume. I will be keying off of the euro chart for support / resistance signals.

Yen seeing a relief rally, but how high will the Bank of Japan allow it to bounce?

The Japanese yen has continued to rally in the short-term – even though this bounce is almost certainly corrective in nature. The fact that yen futures closed above 1.0702 does mean, however, that the correction has more room to run. All other things being equal, a higher yen has historically been a "risk off" message.

Krona / franc indicator has finally turned lower and broken its uptrend; will a top in equities follow?

Until very recently, my firm's krona / franc indicator (the spread ratio of the EURCHF versus the EURSEK) has been indicating clear krona strength – which was a bullish tell for equities. Now, however, the uptrend line of the indicator has been broken (see yellow box). That gets me to draw the red vertial line at the recent peak and start the clock ticking on when a turn lower in equities may commence. Over the last couple of years, it has taken anywhere from two to three months from where the red line is drawn to where equities roll over. Right now, we're only one month into this countdown. There's no rule saying that the time too an equity peak has to be two to three months, though -- it's just a historical reference.

OVERALL FOR CURRENCIES: Only the Aussie dollar stands out as a clear possible "win" for the risk bulls out there. The rest of our indicators are either neutral or bearish in terms of their "risk-on / risk-off" messages.

So, what does all of this information on bonds and currencies tell me?

That the "all clear" still cannot be sounded for the risk bulls. In order for me to feel more bullish on risk assets, I will want to see the S&P take out 1,580 on a closing basis, the yield on the 10-year Treasury start rising instead of falling, the EMB and JNK funds start performing more in-line with stocks and at least one more of the risk currencies start turning their chart from bearish to bullish. I know it's a tall order, but until some or all my list of "demands" is met, this rally in stocks seems about as legit as the Bonds / McGwire homerun records in baseball.

Twitter: @seachangereport

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