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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.

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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