Keep a Close Eye on the Yen

 | Jun 12, 2013 | 6:00 AM EDT  | Comments
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TLT

As bad as the statistics were from Tuesday's trading, the individual stock charts still seemed reflect very little selling. But let's look at some of those numbers.

First of all, breadth was horrendous. It actually came in worse than it did during last week's 22-point slide on the S&P 500. So that has done nothing to help the McClellan Summation Index, which continues to point down and has made a lower low.

McClellan Summation Index

In addition, we saw a rise in the number of stocks making new lows, both on the NYSE and -- in a new development -- on the Nasdaq. I would, of course, like to see this number contract instead.

Number of Stocks at New Lows -- Nasdaq

I would remind you once again that the market is not oversold in the intermediate term. The earliest I can see that happening is late June or early July. At the same time, the market is 3% off its highs and the put-call ratio has been above 100% for seven of the last eight trading days -- a combination that I don't believe I have ever seen before. The equity put-call ratio, for its part, went above 80% for the first time since April 19, which was a low in the market.

In other words, a mere 3% off the high and folks are panicking. It would not surprise me one bit to see the market rally for another day or so, but I don't think it will go very far without oversold readings on the intermediate-term indicators.

Turning to U.S. Treasury bonds, I realize the move in interest rates was marginal at best Tuesday -- but, as I noted midday, those rates looked as if they had gone far enough. Just over a week ago, we looked at the seasonality of bonds and discussed how rates have tended to peak by mid-June in the past several years. If we use iShares Barclays 20+ Year Treasury Bond (TLT), you can see it more clearly. Tuesday, with its reversal, was an outside day -- yet I saw very few folks fussing over it. Rather, market players all continue to call for higher rates. I think short-term rates are peaking.

I do not have a target on this yet, as I must wait for a pattern to emerge so I can measure it.

TLT -- Daily

Then there is the yen. Why does everyone fuss so much over it? Well, heck, haven't you noticed that it has been somewhat of a market leader? The good news: It hasn't broken support yet. The bad news: Currencies are not supposed to move 3% in a day.

There was a time when folks used the yen as a carry trade. I don't believe that's what is happening now. At this point, I think so many folks are in the "short yen" trade that the boat is simply overloaded. If one trade moves against you, it can affect other trades you have, so it's important to watch this. If the yen starts to unwind, it should have an effect on other markets, namely the S&P.

This 95-to-96 area on the dollar-yen cross has acted as a support so far, depending on the thickness of your pencil as you draw it in. Should the currency pair sink below that level, it would complete the head-and-shoulders top that would then measure to under 90.

Dollar-Yen

So if you want the S&P to hold that uptrend line that it has held all year, and if you want the 50-day moving average line around 1610 to remain intact, you'd better hope the yen holds as well. I think it will eventually break support, even if it doesn't do so Wednesday.


 

Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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