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Currencies Raise a Red Flag; Is It Time for a Pause in the Stock Rally?

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Although currency charts are the number-one concern right now, even bonds may be foretelling a pause in the rally in risk assets.

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Basically, we're seeing a bull market condition in equities, but none of the other asset classes are confirming this action fully. Even with the stock charts, we're seeing great technical positions, but very poor reward / risk ratios for new market entrants. I'm sure everyone would agree that a pullback in stocks would be healthy and welcome at this point.

STOCKS

US large caps remain bullish – even in their consolidation.



The US large cap space – represented above by the S&P 500 (INDEXSP:.INX) -- looks like it is just about at its next projected upside target range of 1,640.69 to 1,646.26 (it finished Monday at 1,633.77 -- less than 1% away from the target). It is clearly in a strong technical position – which makes short-selling against this market a risky proposition. However, having higher-than-normal levels of cash on hand at this point may not be the worst strategy in the world. My current call is for a pullback to occur after resistance is tested. The pullback could theoretically take the S&P back to the November lows, but I wouldn't bet on that happening at this point. The chart above shows the possible pullback targets for the S&P: 1,530, 1,495, and 1,459 (and 1,350 as mentioned).

BONDS

Treasury yields finally have acted as they should in a "normal" market environment. Will that continue?



The yield on the 10-year Treasury Note has risen almost parabolically over the last week and a half. It has bounced right up to the "correction resistance" at 1.928% -- which also corresponds nicely with the 61.8% retracement of the March to May decline in yields. With the Williams %R reading giving an overbought signal right now, it would certainly appear that yields should decline from here. If the wave count on the chart is correct, we should see new lows in yields set on this next decline. That type of action would almost certainly coincide with a decline in risk assets in the short-term.

High yield debt is on the rise, confirming the bullish action in stocks recently.



The Columbia High Yield Bond Fund (MUTF:INEAX) is shown as a proxy for high yield debt in the monthly chart above. Based on my analysis of this chart, it would appear to me that there's much move upside still to come for junk bond prices. With the price currently at $3.08, a rise to the ultimate upside target of $3.63 represents very nice upside potential for this category of bonds in general (and for this fund in particular). Still, though, if there is to be a short-term pullback in risk assets, perhaps you may be able to buy junk bonds a little cheaper in the near future.

Emerging markets fixed income prices are also on the rise and indicate a possible intermediate-term "risk-on" bias.



The iShares Emerging Market Bond ETF (NYSEARCA:EMB) has struggled since late last year -- which was an accurate reflection of the distrust investors have had in emerging market assets in general. Based on the view of the chart above, that weakness may have just been a consolidation wave (iv of 5) leading up to one more rally (wave v of 5) with an upside target of $130.07 (from $119.77 recently). I would be looking to buy into EMB on a further pullback to the uptrend line at around $118 with a stop in place on any close below $117.05.

German Bund Yields

The yield on the 2-year German bund has bounced off of a short-term low of .01%, but it is not exactly setting the world on fire to the upside. I cannot give any real edge to the bulls in this instance.
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No positions in stocks mentioned.

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