Price Headley's  Instablog

May 26, 2009

Despite some intra-week volatility, we closed out last week near unchanged on the major indices.  Earnings reports this week are heavy in the retail/consumer sector, with names such as DLTR, RL, SPLS, BIG, COST, HNZ & TIF due in the coming days.  On the economic calendar is Home Sales, Crude Inventories, and Preliminary GDP among other reports.  Also in the news is an upcoming GM restructuring plan and North Korea military activities.

Stocks have been faltering a bit, but the underlying uptrend in place since the March 9th bottom has not yet been breached.  On the S&P 500 Index (SPX) Daily chart below, you can see that Percent R has failed to complete another bullish re-test ... however, we currently remain in the top half of Acceleration Bands and above key exponential moving averages;   so it may be premature to call an end to uptrend at this time.  In addition, Daily Percent R has yet to break below the key 50 mid-level.

SPX Daily Chart

 

We've mentioned several times the importance of the 30 level on the CBOE Volatility Index (VIX), and you can see on the chart below that we closed above 30 after testing below that level intra-week.  The VIX does look likely to at least hold 30 as downside support, which would indicate that potential stock upside will be tempered ... and a bounce higher in the VIX is a fairly strong possibility, which would likely be bearish for stocks.

VIX Daily Chart

Bond prices continue to fall, and government bond yields continue to rise.  You can see on the following chart of the 10 Year Treasury Rate Index (TNX) the steady uptrend in yields basically since the beginning of 2009.  Some of this is likely due to economic recovery hopes as well as potential inflation fears -- but it also must be remembered that there was a massive "flight to quality" in bonds when things looked very dire late last year, and this is being "unwound" to some degree.

TNX Monthly Chart

The Dollar has been moving lower recently.  The following chart is the Dollar Index (DXY), which tracks the U.S. currency's movement against 6 major trading partner currencies.  The Euro is a majority component of the counter-currencies to this Index.  You can see from this longer-term Weekly Chart that a 2006 to 2008 downtrend in the DXY was broken during the worldwide financial crisis, as there appeared to be a "flight to quality" into the Dollar.  However, we have since entered a wide choppy range, and the current downtrend appears likely to continue.  For example, Weekly Percent R on the DXY has breached its bottom levels for the first time since the volatility began in mid-2008.

DXY Weekly Chart

Bottom Line: The underlying stock uptrends remain in place for the time being, but risk levels are high, and a downside correction could be coming soon.  The VIX, Interest Rates, and the Dollar are all contributing to a potential negative underlying tone for the U.S. markets.

Trade Well,
Price Headley
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