Sign of Change in Stock-Bond Relationship

There is a long-term sign that we are in a gradual process of a change from a deflationary environment to an inflationary environment based on a relationship change between stocks and treasury yields. The chart below shows the correlation between the S&P 500 index (SPX) and the 10-Year Treasury Yield index (TNX) over last 30 years. From 1981 to 1999, the correlation mainly stayed in a negative territory that means stocks have an inverse relationship with treasury yields (or positive relationship with treasury bonds). Since 1999, their correlation has changed and mainly stayed in a positive territory, i.e., stocks have a positive relationship with treasury yields (or inverse relationship with treasury bonds).

Recently, their relationship started to change again as the correlation line crossed below the zero line and got into a negative territory as indicated in the chart. The negative relationship between stocks and treasury yields usually happens in an inflationary environment. One tendency is that stocks and bonds happen to move in the same direction. It should be no surprise to see that stocks and bonds recently moved up at the same time. Another tendency is that commodity-related sectors become outperforming the general market. This week we have semiconductors, oil equipment, and energy sectors ranked on the top.

Table of Contents

• Broad Market is about to be in a Short-Term Neutral Time-Window
• Sector Performance Ranking with Semiconductor Sector Leading
• S&P 500 Index in Intermediate Impulse Wave 5
• German DAX Index: Elliott Wave
• India Bombay Stock Exchange Index in Bump Phase
• Shanghai Composite Index: Long-Term Picture
• Major Global Markets Performance Ranking
• US Dollar Forming 8-Month Trading Range
• US Treasury Bond in 3-Month Bullish Uptrend Channel
• Gold Reached Price Target of 2-Month Descending Triangle Pattern
• Silver Continues in 3-Year Falling Wedge Pattern
• Gold/Silver Stocks Falling from 4-Month Head-and-Shoulders Pattern
• GDX Gold Miners ETF Falling from 4-Month Head-and-Shoulders Pattern
• Crude Oil Forming 4-Month Ascending Triangle
• Asset Class Performance Ranking with Equity Leading

Broad Market is about to be in a Short-Term Neutral Time-Window

The LWX (Leading Wave Index) is Nu Yu’s proprietary leading indicator for US equity market. LWX>+1 indicates bullish (green); LWX< -1 indicates bearish (red); The LWX between +1 and -1 indicates neutral (yellow).

The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 1 on 6/6/2014 (down from 12 the previous week) which is below the panic threshold level of 42 and indicates a bullish market. Based on the forecast of the Leading-Wave Index (LWX), the broad stock market would be in a short-term neutral time-window until 6/13/2014 (see the second table above). The daily chart below has the Wilshire 5000 index with both the BIX and the Momentum indicators. The current market status is summarized as follows:

The following table is the percentage change of sectors and major market indexes against the 89-day exponential moving average (EMA89). The Wilshire 5000 index, as an average or a benchmark of the total market, is 4.18% above the EMA89. Outperforming sectors are Semiconductors (8.26%), Oil Equipment (7.67%), and Energy (5.78%). Underperforming sectors are Precious Metals (-3.10%), Internet (0.02%), and Telecommunication (2.36%).

As shown in a daily chart below, corrective wave (4) from January to April was in a formation of a A-B-C Running Flat correction because wave B ends beyond the beginning of wave A, and wave C falls short of stopping near the end of wave A. Running Flats usually indicate a strong market. Intermediate upward impulse wave (5) started right after wave C. Now it is in primary wave [3], intermediate wave (5), and minor wave 1.

Intermediate wave (5) is an upward impulse wave also the final leg of long-term primary wave [3]. The length of wave (5) will approximate to one of wave (1)., which is about 300 point for the S&P 500 index.

The German DAX index has had a very high correlation with the S&P 500 index for last 20 years. Currently it has a similar Elliott Wave structure to the S&P 500 index, and it is in primary wave [3], intermediate wave (5), and minor wave 1.

Intermediate corrective wave (4) has been in a formation of a horizontal trading range between 9000 and 9750 with an A-B-C corrective pattern. The advance during last several weeks started intermediate upward impulse wave (5). Now it is in minor wave 1 of wave (5).

In the weekly chart of the India Bombay Stock Exchange 30 Sensex index, there is a possible development of a Bump and Run Reversal Top pattern. According to Thomas Bulkowski, the Bump-and-Run Reversal Top pattern consists of three main phases:

1) A lead-in phase in which a lead-in trend line connecting the lows has a slope angle of about 30 degrees. Prices move in an orderly manner and the range of price oscillation defines the lead-in height between the lead-in trend line and the first parallel line.

2) A bump phase where, after prices cross above the first parallel line, excessive speculation kicks in and the bump phase starts with fast rising prices following a sharp trend line slope with 45 degrees or more until prices reach a bump height with at least twice the lead-in height. Once the second parallel line gets crossed over, it serves as a sell line.

3) A run phase in which prices break support from the lead-in trend line in a downhill run.

Since March of this year, the Bombay index has been in the Bump phase with a sharp trendline as excessive speculation drives prices up steeply. Now it reaches the second parallel line. As long as prices stay above the sharp bump trendline, the bump phase will continue.

The following weekly chart of the Shanghai Stock Exchange Composite Index shows a 5-year falling wedge pattern. After a long time sliding, it should be close to a point to challenge the upper boundary of the falling wedge possibly in this year. Falling wedges typically build up a bullish bias as it becomes mature. This bullish bias can be realized only when prices break through the upper boundary of the wedge to the upside.

Also the Shanghai index has formed another 1.5-year descending triangle pattern inside the falling wedge. It provides us another technical gauge to measure moves of the index. The index has defended the level of 2000 very well for last one and half years. Now it still stays above 2000. Hopefully it is in a bottom process.

The table below is the percentage change of major global stock market indexes against the 89-day exponential moving average (EMA89). Currently Indian market is outperforming. The Chinese market is underperforming.

The U.S. dollar is forming a 8-month trading range between 79.2 and 81.4. Last month it bounced off the lower boundary of the trading range. The upper boundary of the trading range should be the next price target.

The following chart is a daily chart of the 20-year U.S. treasury bond TLT ETF. It is in a 3-month bullish uptrend channel.

The gold index had a bearish downward breakout from a 2-month descending triangle pattern. A downside price target was projected at 1247 based on the downward breakout of the descending triangle. The price target was reached last week.

The silver index has formed a 3-year falling wedge pattern. After a long time sliding, it should be close to a point to challenge the upper boundary of the falling wedge. Once it breaks above the the upper boundary of the wedge, silver could become bullish in the intermediate-term. It should be neutral before a breakout from the wedge.

Also silver formed a 8-month descending triangle pattern inside the falling wedge. It provides us another technical gauge to check moves of silver. Currently it is pulling back from the upper boundary of the triangle. It may look for a support around 19 near the horizontal boundary of the triangle.

Gold/silver mining stocks has broken below the neckline of a 4-month head-and-shoulders pattern. A downward breakout target is projected at the previous low around 80.

The GDX Market Vectors Gold Miners ETF has broken below the neckline of a 4-month head-and-shoulders pattern. A downward breakout target is projected at the previous low at 20.5.

Crude oil is forming a 4-month ascending triangle pattern. Currently it is in a downward wave towards the lower boundary of the triangle. No price target is projected before a breakout.

The following table is the percentage change of each asset class (in ETFs) against the 89-day exponential moving average (EMA89). Currently equity is outperforming and gold is underperforming.