Saturday, September 7, 2013

MTU Weekend Ed. - Stocks and Bonds (9/6/13)

The sell-off since the August high in stocks has produced non-confirming wave structures across leading indexes (see below). The mid-August gap, from 1679.61 to 1684.83 in SP500, remains likely to be filled in the foreseeable future, interim fluctuations notwithstanding.

Long-term bonds likely have bottomed and yields peaked for the near term.  A retrace over the next two months, or a reversal at the extreme, can be expected.

It will be interesting to monitor and reconcile the macro conditions surrounding the proposed near term upswing in both stocks and bonds, including the economic data stream, Fed actions, and geopolitical developments.

See Monthly Outlook Update (8/30/13) for additional discussion.

Stocks

The August sell-off in stocks has produced disparate wave structures among leading indexes.   Senior indexes, SPX/INDU/WLSH, shows a plausible regular five-wave decline which is either complete or a fifth wave short (Chart 1).   However, SP400, a mid-cap index, introduces the possibility of a double three alongside a potential regular five-wave drop (Chart 2).  Yet Russell 2000, a small-cap index, can only accommodate an overlapping leading diagonal decline and can be easily counted as a double three (Chart 3).  Last but not least, Nasdaq 100 (NDX) sports a potential triangle and is a fraction of a point from a new recovery high (Chart 4).

SP500                                                                          SP400

Russell 2000                                                                Nasdaq 100

Given these near term wave structures, especially the leading diagonal on the bearish side and double threes and the triangle on the bullish side, it is reasonable to expect that the mid-August gap, from 1679.61 to 1684.83 in SP500, to be filled in the foreseeable future, interim fluctuations notwithstanding.   See our gap analysis in This Gap is Different (8/23/13).


Bonds

Long-term bonds likely have bottomed and yields peaked for the near term.  With this past week's spike, one is now able to account for every subdivision of a regular five wave rise in 10-year Treasury yield since its May low (Chart 5).  A retrace over the next two months, or a reversal at the extreme, can be expected.






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