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Of, relating to, or affected with schizophrenia. Schizophrenia: Any group of psychotic disorders usually characterized by withdrawal from reality, illogical patterns of thinking, delusions, and hallucinations, and accompanied by other emotional, behavioral, or intellectual disturbances.

The above paragraph was taken from www.dictionary.com and verbally describes the mental illness, which at times we could argue I (Jeff Bailey) have shown from time to time. While www.dictionary.com doesn't include pictures like a Webster's dictionary might, here's a chart of the 10-year YIELD ($TNX.X) which shows signs of Schizophrenic behavior developing after today's trade. Behavior I think may require further attention above 4.6%, where equity traders might look for an emotional breakdown in the major indices.

10-year YIELD Chart - Daily Interval

A Treasury bond bull might already think the bond market suffers from Schizophrenia. The 10-year bond, based on YIELD now looks "oversold," but you can bet those trader's that took down (bought) some of last week's $18 billion 10-year auction may have flushed (sold) that trade today. To put that trade in perspective, the September 10-year Treasury futures contract (ty03u) 110'165 fell 1.54% today, and Thursday's 10-year auction had a 4.37% YIELD attached to it. Only 9-years and 359 days left to maturity!

Some data released today by the Mortgage Bankers Association (MBA) had its Weekly Mortgage Applications survey for its Market Composite Index of mortgage applications for the week ending August 8 showing a 16.1% decrease to 824.6 on a seasonally adjusted basis from 983.2 in the week prior. On an unadjusted basis, the index fell by 16.3% compared with last week and was down 17.6% compared with the same week a year ago.

The MBA seasonally adjusted Purchase Index decreased by 10.3% to 409.6 from 456.4 the previous week. The seasonally adjusted Refinance Index decreased by 20% to 3238.4 from 4047.5 one week earlier. Other seasonally adjusted index activity included the Conventional Index, which decreased to 1183.7 from 1413.3 the previous week. The Government Index decreased to 225.5 from 265.4 the previous week.

"The contraction in mortgage activity continued last week with the level of refinance applications falling to about a third of what they were when they peaked in late-May and early June," said Jay Brinkmann, MBA's vice president of Research and Economics.

Dow Jones Home Construction Index (DJUSHB) - Daily Interval

I've shown different retracement on the DJUSHB, but it was back near 445 when we first became alert to potential weakness in the sector on thought of rising Treasury YIELDs. I was curious to see just how many homebuilders were in the SPX, and was a bit surprised to only see CTX, KBH and PHM as components. Not a lot of weighting, but home construction had been one of the positive spots for the economy the past few years.

Make note. The economy, nor the stock market NEEDS the homebuilder to do well for economic prosperity. In fact, homebuilders didn't trade all that bullish from 1998 to 2000 when the economy was growing by leaps and bounds and the major market averages were moving higher.

With the homebuilders still looking vulnerable and YIELDS looking like they might continue to move higher, with bond trader's showing some signs of Schizophrenia, the main question still being pondered is if the economy is showing enough improvement in other areas to take up some slack that higher Treasury YIELDS seem to be creating in the mortgage business.

One economic indicator/report due out this week (Friday morning) that is going to get A LOT OF ATTENTION is the July Industrial Production (forecast of 0.2% rise, compared to June's 0.1% gain) and the July Capacity Utilization (forecasted at 74.4% compared to June's 74.3%). The reason I think these two numbers are going to get a lot of attention is that capacity utilization is at multi-year lows. Thinking just the opposite of 74.3%, roughly 25.7% of the nations industrial capacity is sitting idle!

I'd have to think today's rather lackadaisical stock market trade with YIELDS moving rather sharply higher has equity bulls believing capacity utilization is going to be above 74.4% forecast and that the increased usage of capacity will have some recently laid off workers coming back to the payrolls.

We'll see, but bank bulls, depicted partially by the S&P Banks Index (BIX.X) 302.16 -0.90% weren't so sure at today's open, as the BIX.X found selling almost immediately at the open at our WEEKLY R1 of 305.40, most likely on the higher bond YIELD trade at the open. For some reason.... I would have to think there were some computers set to sell the regional banks at that level, on a 10-year YIELD back above its WEEKLY R1 of 4.435%. And that trade has me wondering "why?" We've laid that scenario out already. The only reason to sell a bank stock is if the higher consumer lending rates being created by higher YIELDS has loan generation business falling off (see MBA weekly mortgage statistics), that a still struggling jobs market for job creation might not be fully offsetting.

Pivot Analysis Matrix

While the homebuilders don't have a lot of weight in the SPX/OEX, the financials do.

Now, don't be overly confused by all the levels of correlation highlighted in the BIX.X at the WEEKLY level, just get a feel for a range between 298 and 308, with a tighter range being seen of 300 to 305. It's that pink box of 293, which the BIX.X hasn't traded since May 23rd during its upward trend and assault to its July 14th relative high of 317.94, where 293 then ties into a BEAR's scenario for the 1.5 step back, for every step forward type of trade.

If Treasuries unwind further, with YIELD higher, I still think it will weigh on the broader market averages, if not the homebuilders and banks.

S&P 500 Index Chart - Daily Interval

Again... I'm not calling for "doom and gloom" for stocks, but a slow move lower type of trade. I thought that bears should initiate trades today on the move back below WEEKLY R1 of 988, but I will admit that on Monday, when bulls from 965 may have raised a stop to 979 on that long, and even turned and shorted/put the SPX when that level was traded intra-day (YIELDs started moving higher, banks weren't trading all that strong), so I'm (Jeff Bailey) still operating from a bear's perspective of being short/put at 979 and understand there's still some work to be done for the 1.5-step backward to a 957 type target, which I'm trying to envision with Stochastics then reaching "oversold" again, before the next 1-step higher. There's no way I can really say/think that Stochastics reach "oversold" at 957, but how I try and get a feel for SPX price action, while taking in various observations from YIELD, banks, homebuilders, technology stocks, etc.

Today's trade saw a net gain of 1 stock to a point and figure buy signal (May Dept. Store (NYSE:MAY) $26.92 +2.08%) in the broader S&P 500 Bullish % ($BPSPX). This has the bullish % edging up 0.2% to 74.2% and still reading "bull correction" status.

S&P 100 Index Chart - Daily Interval

I need to make IMEDIATE correction to last night's Index Wrap when I originally wrote that institutions might be looking to sell Sept. 405 calls and buy Sept. 485 puts when discussing the VIX.X action, which may hint of this type of trade. Instead of 405, I should have typed 505! See how darned easy it is for a trader to accidentally type in a wrong number, which might set off a huge computer-related program error like we've seen sometimes?

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 the bullish % rising to 81% after reading 80% for four consecutive sessions. Still "bull confirmed" and would take a reading back lower at 78% to reverse lower into "bull correction" status.

Real quick, for those new subscribers to OI that may not have seen how I like to use retracement in order to interpret Market Volatility Index (VIX.X) 20.62 +2% action, here is a weekly bar chart interval of the VIX.X. All I'm doing is trying to slice up the VIX.X with some levels that retracement allows for.

Market Volatility Index (VIX.X) - Weekly Intervals

I've made some quick notes as to market events that took place the day before the VIX.X traded my 25.66 level. Two reasons may be the rather anemic 3-year Treasury note auction of $24 billion on August 5th and Cisco Systems (NASDAQ:CSCO) $17.59 -1.34% earnings report after the August 5th close.

However, I also think that with the S&P 500 Bullish % ($BPSPX) recently reversing into "bull correction" status at a high level of bullish risk, institutions may not longer be selling naked put premium and buying calls (doesn't it make sense that they would be selling put premium up at VIX.X 40.00 when premiums were high, but RISK low at 28% bullish?), but may have turned to selling naked call premium and buying puts (would it make sense to sell out the money call premium, even when premiums are low, but hedge some inventory to the recent lows, when RISK has been high and bullish % starting to slip lower?) Right now, we're on the alert for this type of shift in institutional thinking.

Dow Industrials Chart - Daily Intervals

I can't come up with a technical reason to explain today's early morning reversal in the Dow Industrials, except that higher YIELDS may have brought some selling in early, with a reward potential of 9,344 being limited by the more "overbought" Stochastics. We'll note the SPX/OEX closed back below their WEEKLY R1's and INDU closed just above. As it relates to the WEEKLY pivot levels, the Dow has been a little stronger in the WEEKLY pivot than the SPX and OEX.

Today's trade saw not net change in the very narrow Dow Industrials Bullish % ($BPINDU) and still remains "bull correction" status at 80.00%.

NASDAQ-100 Tracking Stock (QQQ) - Daily Interval

The QQQ/NDX did show some strength relative to the INDU/SPX/OEX today, but the rebound from the recent lows may be tiring as I look for the INDU/SPX/OEX to begin a choppy near-term consolidation before they make another step back.

Today's trade saw no net change in the NASDAQ-100 Bullish % ($BPNDX) and status remains "bear confirmed" at 64% bullish.

Ahead of tomorrow's after-the-bell earnings from Dell Computer (DELL) $31.31 -1.44%, is that their earnings and conference call is going to be somewhat upbeat, with further capture of market share from other box makers and Sun Microsystems' (NASDAQ:SUNW) $3.55 -1.1% server business, but looking for QQQ resistance back near $31.35 to be formidable. If YIELDS continues higher, as they look like they're headed, then I would think QQQ bears are lying in wait at $31.35, and there may be some bulls looking to exit on a rally at that level too.

Jeff Bailey

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