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Index Wrap

Dollar, Treasuries and stocks find selling

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Less than robust economic growth data as depicted by the June leading indicators gain of 0.1%, along with still cautious outlooks from companies after reporting quarterly earnings found a weaker dollar, Treasuries and stocks in today's trade.

While June's leading indicators showed 4 segments improving, 4 segments weakening and 2 holding unchanged, the rather anemic growth numbers were not able to stem selling in Treasuries as the benchmark 10-year YIELD ($TNX.X) jumped 20.5 basis point to YIELD 4.174% by the close. The continued and rather sharp rise in YIELDS, especially the 10 and 30-year maturities has mortgage rates rising noticeably in the recent weeks and looks to pressure investor sentiment that the sharp rise will eventually pressure the housing markets, which has been one of the main drivers for economic stability the past couple of years.

Since the Fed announced it was cutting its Fed Funds target rate 25 basis points to 1.0% on June 25th, the benchmark 10-year YIELD has risen 81.3 basis points, and the highest YIELD on the 10-year since January.

As I write tonight's wrap, I'm going back and looking at some benchmarks and comments from our June 25th Index Trader Wrap and notes there as it related to a "sharp" rise in Treasury YIELDS does look to be having negative impact on the Dow Jones Home Construction Index (DJUSHB) 414.32 -2.12% with www.Realtor.com showing that the national average of a 30-year fixed rate mortgage had risen to 5.82% on Friday, which was 53 basis points higher than our June 25th benchmarking of 5.29%.

To put the recent backup in mortgage rates in perspective, a $250,000 30-year mortgage at 5.25% had the monthly principal and interest payment totaling $1,380.51, while using a 5.75% 30-year mortgage rate calculation produced a $1,458.93 monthly payment. While I couldn't match current rates exactly with Realtor.com's mortgage rate calculator, the recent backup in mortgage rates for a 30-year mortgage represents a 5.68% increase in the monthly payment, or $78.42 per month. This may not appear to be that much of an increase in a monthly payment, but the rather "sharp" increase is what may have some traders/investors concerned regarding the housing sector near-term.

I'm noting here that since June 25th, the DJUSHB is lower by 5.61%, suspiciously close to the increase of a $250,000 monthly mortgage payment for a 30-year mortgage.

While stocks look near-term oversold as do Treasuries, the continued unwinding in the bond market resembles that of a technical breakdown in price (YIELDS breaking out to upside) as bond traders there look to unwind some losing positions, or protect what gains are left since the beginning of the year.

As we get set to look at the major indexes, on Thursday I wanted to wait until Friday's trade was completed and get a look at some of the new WEEKLY pivot levels. Since Leigh Stevens writes the Friday wraps so that I can tackle a question in the Ask the Analyst column, I posted the following matrix in Friday's Market Monitor.

Pivot Analysis Matrix

In this weekend's Ask the Analyst column I tried to give some insight into a trader's question regarding M1, M2 and M3 money supply. As it relates to the selling we're seeing in the 10-year Treasury, I believe it is the SHARP or rate of rise in YIELD for the 10-year and 30-year YIELDS that weigh on investor psychology. While the Dollar was weak today with the U.S. Dollar Index (dx00y) 96.20 -0.68% showing some money left the United States, here's what I'd be looking at for the 10-year YIELD trade this week.

10-year YIELD ($TNX.X) - Daily Intervals

In this weekend's Ask the Analyst column, the trader noted the "surge" in money supply, but was wondering why stocks didn't appear to be "surging" along with the increase. Today's further sell off in Treasuries should also see money supply growing even though some money may have left the U.S. as depicted by the weaker dollar.

While Treasuries are acting like oil and water with equities, its got to be the sharp rise in Treasury YIELDS, which will have mortgage rates rising almost step-for-step.

This rather sharp selling in Treasuries unwound again today and with YIELD pegging its highs, I'd be looking for a "blow off" type of climactic sell up near the weekly R2 at this point. It is very difficult to say what a bond bull will do if he she panics, but I would think that there would be some eager bond bulls to buy a 4.36% YIELD for a trade.

My thought tomorrow is if bond bulls do like current YIELD, based on recent cautious outlook from some companies having reported earnings and still rather anemic economic data, that YIELD may try and settle in, back near the weekly Pivot.

One reason I think there has been some talk out of the Fed that it may not be looking to buy longer-term bonds back at this point is due to the healthy increases in money supply.

The Stochastics on the 10-year YIELD chart above would be what I consider to depict a bond market that is now near-term "oversold" and YIELD is "overbought." The trend from MACD shows just how "sharp" the recent unwinding of bullishness in Treasuries has been with 4-months of gains erased in just about a month.

I would say that the Fed may have played "dirty pool" with bond traders several weeks ago when it said it may look to buy back longer-dated bonds. Bond traders obviously tried to "front run" on those comments, but recent comments out of the Fed that it may not be buying back longer-dated bonds has some bond bulls very angry and more aggressive with their selling as losses begin to mount.

S&P 500 Index Chart - Daily Interval

When writing this weekend's Ask the Analyst column and looking at the table presented in that article, I would think that money supply grew today and this growth in money supply may well create some support for the SPX back near 956, where a spike higher in the 10-year YIELD to 4.36% being a trade to look for any type of reversal back lower in YIELD and higher in the SPX. I'm definitely begin looking for a short/put entry point back near SPX 996 and ideally back at 1,004 at base of broken upward trending regression. Currently I would tie an SPX to a 10-year YIELD at 3.9%. If we continue to see dollar selling (money leaving the U.S.) then I would look for SPX to build more resistance at the 996 level.

Today's trade saw a net loss of 2 stocks to point and figure sell signals in the S&P 500 Bullish % ($BPSPX) as the bullish % slipped 0.4% to 76.80%. This would be some sign of "bearish divergence" as it relates to the 70.93% bullish % reading when the SPX recently "spiked" lower to 962.10 on July 1. It is the recent bullish % high reading of 80% on the rally early last week where we saw an almost matching SPX high, but the internals as depicted by the bullish % didn't come as close to the mid-June high reading of 82.83%, which has me a more willing seller now back near SPX 1,000.

S&P futures (sp03u) settled at 978.00 and after another round of earnings reports after the close, trade 977.90, so basically unchanged.

S&P 100 Index Chart - Daily Interval

Larger caps, when compared to the SPX, which has some mix of "mid-caps" got hit today and harder in percentage terms than the tech-heavy NASDAQ-100 Index (NDX.X) 1,240.78 -1.51% after tech has been exhibiting greater weakness in recent sessions.

Today's trade saw a net gain of 1 stock to a point and figure buy signal in the narrower S&P 100 Bullish % ($BPOEX) and has this bullish % right back at its bull cycle high reading of 83%. Air courier Federal Express (NYSE:FDX) $66.00 +1.04% was the stock to give a reversing PnF buy signal today and triggered a triple-top buy signal at $66.00.

Dow Industrials Chart - Daily Interval

Recent standouts from earnings have had INTC, CAT and MMM keeping the Dow Industrials in somewhat of a range between 9,222 and 9,000. I do think that today's selling in HPQ was largely due to today's earnings report from Lexmark (NYSE:LXK) $59.40 -19.1%, but HPQ has a much broader-based business model than LXK.

Recent comments from some of the upside earnings reports have been largely focused on benefit from a weaker dollar. With the Dow looking to be consolidating, I'm hesitant to short/put, but resistance should be firm back near 9,300 and provides a better risk/reward trade for bears here.

Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU) as still reads "bull confirmed" at 83.33%.

NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Interval

Thursday evening I was eyeballing the QQQ for support in the $30.25 to $30.50 and I think the QQQ may exhibit similar trade based on its Oscillators as found in late to mid-July. While the number of new 52-week highs versus lows at the NYSE (63:36) haven't been looking as if there's a lot of bullish leadership, today's NASDAQ Composite breadth at new highs vs. new lows (124:11) actually showed improvement from Friday's trade and still has some bullish leadership intact.

I'd play another partial bullish trade, but partials only and use the rising 50-day SMA as a bullish stop. Today's trade did see a net loss of 3 stocks to point and figure sell signals and has the bullish % slipping back 3% to 78% after holding steady at 81% bullish for 4 sessions.

Jeff Bailey

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