The stock market pulled back a bit last week as the recent breakout to new recovery highs failed to garner any follow through momentum. We suspect the double-edged sword of rising interest rates and crude oil prices had a lot to do with the recent hesitation among investors. The 10-year Treasury closed the week yielding above 5% while crude oil approached a record high.
The S&P 500 fell back to a couple pieces of important short-term support and held last week. The first piece of support came from the 50-day simple moving average, which came in at 1288. The lowest close for the index this week was 1286.57. The other piece of support was a trendline off the recent lows, which sits at 1287. The S&P 500, on an intraday basis, almost fell to its 80-day simple average at 1282.50. The intraday low for the week was 1282.96.
Additional chart support can be found at 1272 and 1255, and these are based on the closing lows from March and February. Strong, intermediate-term chart support lies at 1245. On the upside, chart resistance lies between 1295 and 1314.
There was some minor technical damage last week, in our view, so we must express at least some caution for the next couple of weeks. The S&P 500 broke trendline support, drawn off the October, 2005, and March, 2006, lows. In addition, the recent breakout point of 1295 was taken out on a minor basis this week. However, there have been many failed breakouts to recovery highs over the last couple of years with some leading to minor pullbacks and others leading to more substantial pullbacks, but nothing serious.
Stepping back, the S&P 500 has bumped up against the top of a channel that has been in place since August 2004 so it would not be surprising to see a return trip to the bottom of the channel sometime in the not too distant future. The bottom of the channel sits down in the 1240 area, very close to important intermediate-term chart support.
Momentum on a weekly basis has been virtually flat since the middle of January, reflecting the lack of upward progress by the S&P 500. However, the weekly moving average convergence/divergence has rolled over and has undercut its signal line, giving us a potential warning for the market.
The weekly MACD has not yet given a full-blown sell signal because it remains above zero. The daily MACD is below its signal line and very close to breaking below zero. This is the first time that the daily and weekly MACD have dropped below their respective lines since September 2005. Very short-term RSI readings, such as the 6-day, have dropped to oversold levels, however, other daily and weekly RSI readings are at neutral areas.
The Treasury bond market had the most interesting action last week as the 10-year yield finished at 5.04%. This is the highest yield for the 10-year Treasury since June 10, 2002. In our view, bonds have completed a massive, multi-year base that started in 2002, suggesting that the long-term trend for bonds has moved from neutral to bearish. The next piece of long-term trendline support is up at 5.25%. This trendline is drawn off the peak in rates in 1994 and 2000. There is also chart support up in the 5% to 5.4% range.
Shorter term, the bond market is as oversold from a price perspective, as any time since 2004, on both a daily and weekly basis. Yields have also run up to the top of a channel that has been in place since June, 2005. We therefore would not be surprised to see a short-term, counter trend move in yields to the downside, within the confines of a longer-term trend of higher yields.
Crude oil prices finished the week at $69.32 per barrel, almost breaking the all-time closing high of $69.81 on August 30, 2005. Crude is now right in the thick of key intermediate-term chart resistance between $69 and $70. A strong break above the $70 level would bring our next target of $80 into focus. From both a daily and weekly perspective, crude oil is not yet overbought, which suggests that prices have more room to advance. In addition, the daily and weekly MACD are in bullish configurations.
However, it appears that both futures investors and Wall Street analysts have turned very bullish on crude oil prices as well as oil stocks. Large speculators, as measured by the Commitment of Traders report, are the most bullish on crude oil since mid-August 2005, right before the Katrina highs.
Commercial hedgers, on the other hand, have moved from a net long position to a net short position. Often, the commercial hedgers are the group that is most often right about the market. In addition, analyst buy recommendations on the group have reached about 70%, an extreme reading. Overall, we see higher oil prices but believe another intermediate-term peak in prices could occur over the next month.