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Charts That Matter: Mid-June Update

06/15/2011

Capital markets remain in a defensive mode with safe haven assets continuing to be the favored holdings. Not much has changed during the first two weeks of June to suggest it is time to abandon those defensive holdings. I still expect the upcoming earnings release period, which begins July 11, to be instrumental in determining the next sustained move for the equities market.
 
The following charts are worth watching:
 
1.       S&P 500® Index
 
Comparisons continue to be drawn to the 2010 mid-year correction. That correction began on April 26, 2010 and lasted until July 1, 2010. The percentage decline was historically high at 16%, and, in fact, well above the 8% correction average since 2006.  On November 4, 2010, the S&P 500 finally recovered, getting back above the April 26, 2010 high.
 
Currently, the S&P 500 rests above its 200-day moving average at 1255.72. Maintaining that support will be critical to keeping the overall bull trend of the past 18 months intact. We shall see, but it would be interesting if the 2011 correction has a similar duration to 2010. I view the upcoming July 11 corporate earnings period as critical. Maybe that's the catalyst for a correction trough.
 
S&P 500® Index, January 2010 to Present

Source: Bloomberg
 
2.       Copper
 
Spot copper prices appear to be stabilizing from the aggressive February to mid-May sell-off. Fundamentals driving the sell-off were Chinese "de-stocking."  Evidence suggests the de-stocking process has ended. "Dr. Copper" is a leading indicator for global growth. Stabilization supports my "slowdown, not meltdown" thesis.
 
Spot Copper, Year to Date

Source: Bloomberg
 
3.       U.S. 10-Year Treasury
 
U.S. 10-year Treasury yields moved aggressively higher from early October 2010 (2.33%) to February 2011 (3.76%). For those "technical mavens," the 50% to 61.8% retracement level is historically known as "the box," or simply put, "major support. "  In the first two weeks of June, that is exactly where the correction in Treasury yields has declined to. Maintaining yields above the box is a necessary component for the S&P 500 to return higher. 
 
U.S. 10-Year Treasury Yields, Past 52 Weeks

Source: Bloomberg
 
 
4.       Bank of America (BAC) Credit Default Swaps
 
One of the favored themes for 2011 has been financial institutions playing catch-up in terms of overall performance. Clearly this has proven incorrect. A continued decline in home prices and a sideways labor recovery have hamstrung financials. In particular, Bank of America has declined 19% year to date, with nearly all of the decrease occurring during the second quarter. The uncertainty of further mortgage losses and the ghost of Countrywide seem to be weighing upon its stock price. For those looking for a change in momentum higher, I suggest keeping an eye on Bank of America's 5-year credit default swaps. A precipitous CDS decline during December 2010 was the catalyst for BAC's stock price to jump $4 in six weeks. The value on the CDS in June has turned higher again. The catalyst for financials to turn higher could be the BAC CDS reversing its recent rise, repeating its December 2010 decline.

Source: Bloomberg

 


Source: Bloomberg

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