Last Week we said: "...the table below shows that most of our "Keys" once again fall into the Near Term Negative category.  Of these, the most immediately influential on market direction are likely to be the relative performance of the Technology Sector versus the broad market, and the reaction of the NASDAQ 100, PHLX Semiconductor Index and COMEX copper contract to major overhead resistance at their 200-day moving averages -- all which are currently being tested.  Ideal conditions continue to exist for at least a near term decline in the US broad market from at or near its current level, but these major overhead resistance levels must hold, while the market-leading Technology Sector begins to underperform the market, for this decline to get underway.  Also keep in mind that April is the 2nd seasonally-strongest month for the S&P 500 since 1957, but this 51-year seasonal pattern makes a significant bearish reversal in May and June."

This Week, most of our "Keys" are again situated in the Near Term Negative category -- which continues to suggest that the March rally in the US stock market is either at or near completion.  This is especially true considering; 1) Technology (the NASDAQ 100 and PHLX Semiconductor) and Small Cap (the Russell 2000) Indexes are positioned just below major overhead resistance levels while technically overbought, and 2) monthly rate-of-change studies show that the S&P 500's rate of ascent has already slowed considerably since early April.  However, through the end of last week near term market momentum was still positive (bullish) in all major US indexes (see Key #1).  It would take a negative shift in momentum this week, accompanied by relative underperformance by the Technology Sector, to indicate that a near term peak is in place. 

1. Market Momentum: NEAR TERM, INTERMEDIATE TERM BULLISH.  During the past week near term daily market momentum has turned back to positive (bullish) from neutral, while intermediate term weekly market momentum also remains positive.  It would take a negative shift in daily momentum to confirm that the near term decline the market is due for is underway.  Until then, expect the recent rally to continue.
    

2. Relative Performance: NEAR TERM BEARISH.  The NASDAQ 100 (NDX) has been technically overbought versus the broad market S&P 500 (SPX) since mid February.  (You can see a chart highlighting this in last week's Keys To This Week.)  More recently, the upper and middle panels of Chart 1 below show that the PHLX Semiconductor Index (SOX, which tends to lead the NDX) has also become technically overbought versus the SPX.  The gray vertical highlights between all three panels show that previous instances of this have led both periods of relative underperformance by the SOX and coincident outright weakness in the SPX.  Assuming that history will repeat, these data suggest that the March rally in the S&P 500 is very close to completion.  In addition, the latest data through Friday continues to show that 29% of all sector bet-related assets are allocated to the Technology Sector (according to our own metric based on the assets invested in the 18 Rydex funds, Chart 2)) -- this is almost double the 10-year average of just 17%.  The last time the percentage of assets invested in Technology was this high was at the end of Q2 2000  -- right as the US broad market was establishing a pretty important top.  Historically, this type of one-sided bet on Technology has coincided with near to intermediate term market peaks, not the beginning of sustainable new bullish trends.
    

3. Overhead Resistance: NEAR TERM BEARISH.  Most major US indexes are testing major overhead resistance levels.  How the market responds to these levels will indicate whether the larger October 2007 cyclical downtrend is still intact and is resuming, or if a more sustainable bottom is in place at the March lows. 

   • S&P 500 (SPX): 840 to 885 -- representing the October 10th benchmark low and the 61.8% and 78.6% retracements of the January 6th to March 6th decline. 

   • Dow Industrials (DJIA): 7,883 to 8,094 -- representing the October 10th benchmark low and the 61.8% retracement of the January 6th to March 6th decline. 

   • Dow Transports (DJT): 2,909 to 3,141 -- representing the November 21st benchmark low and the 61.8% retracement of the January 6th to March 9th decline. 

   • NASDAQ 100 (NDX): 1,383 to 1,388 -- representing the November 4th benchmark high and the 200-day moving average (a widely-watched major trend proxy).

   • PHLX Semiconductor Index (SOX): 254 -- representing the 200-day moving average.  

   • Russell 2000 (RUT): 515 to 519 -- representing the 200-day moving average and the January 6th benchmark high. 
      

4. Volatility (The VIX): NEAR TERM BEARISH.  For the third consecutive week the CBOE Volatility Index remains positioned at its 2009 low extreme of 34, indicating an extreme in investor complacency which had previously coincided with near term peaks in the S&P 500 on January 6th, January 28th, and March 26th.  These data indicate favorable conditions for the SPX to establish another similarly-important peak now.  We discussed this topic in greater detail in our April 9th Asbury Alert entitled, The US Stock Market: Be Careful Of Near Term Investor Complacency.
    

5. Intermarket Analysis (copper prices): NEAR TERM BEARISH.  Copper prices are seen by investors as an economic barometer and have been 77% positively correlated to the Dow Transportation Average (DJT) since 1988.  Since mid April the COMEX copper contract has been testing and holding major overhead resistance at its 200-day moving average (at $2.14 per pound as of the close on Friday) while technically overbought.  This establishes ideal conditions for copper's larger August 2008 downtrend to resume, IF still valid.  (We discussed this in greater detail in our April 15th Asbury Alert entitled, Crossroads In Copper Prices Key to US Economic, Stock Market Direction.)  If a decline in copper does take place from here then, per the correlation, it should be equally bearish for the DJT and for the US stock market in general.
    

6. Overbought/Oversold: NEAR TERM BEARISH, INTERMEDIATE TERM BULLISH.  The major US stock indexes remain technically overbought on a near term monthly basis, but are still only about two-thirds of the way through with working off March technically oversold extremes from an intermediate term quarterly basis. Combined, these factors indicate favorable conditions for a near term broad market decline now, and potentially a more  intermediate term bottom either later this quarter or in early Q3 2009.
    

7. Investor Sentiment:  NEAR TERM BEARISH, INTERMEDIATE TERM BULLISH.  Through Friday, about three-quarters of the professional and retail investor sentiment measures that we track continue to show a strong bias toward the likelihood of a near term decline in US equity prices from at or near their current levels.  The other third of these data indicate favorable conditions for a more intermediate term rise in equity prices to emerge, once this near term decline runs its course. 
    

8. Seasonal Trend: NEAR TERM BULLISH, INTERMEDIATE TERM BEARISH.  May is the 7th seasonally strongest month in the S&P 500 since 1957, and represents a sharp seasonal setback from April, which is the strongest month during this period.  May is also the first of a five-month period of acute seasonal weakness that includes five of the six weakest months during the past 51 years.

Last week, we said: "...ideal conditions for outright strength and relative outperformance by the defensive Utilities Sector corroborate our expectation for at least a near term decline in the US broad market.  The relative performance line between the XLU and SPY (as shown in the upper panel of Chart 4) has been 79% inversely correlated to the S&P 500 since the US stock market peaked in October 2007.  Thus, assuming that this relationship is still intact, relative outperformance by Utilities should coincide with a broad US market decline." 

This Week, favorable conditions for intermediate term relative outperformance by the economically-sensitive Industrials Sector suggests that US economic demand is likely to rebound either later this quarter or by Q3 2009.

• The Industrials Sector:  Chart 3 below displays the Select Sector Industrial SPDR ETF (XLI) in the upper panel and the daily total assets invested in the Rydex Transportation Fund (RYPIX) in the lower panel.  We use this fund's asset flows as an investor sentiment gauge for the Industrials Sector.  The green highlights on the chart point out that the assets invested in the fund are currently at a multi-year under-invested extreme (of less than $16 million) which has previously coincided with or led most of the important bottoms in the XLI since 2002 (as well as extremes in relative underperformance by the XLI versus the broad market, not shown). 
  
  Chart 2 shows that, through the end of last week, 0% of all sector bet-related assets were allocated to the Industrials Sector (according to our own metric based on the daily assets invested in the 18 Rydex funds).  Over the past decade, there were only two other instances when this sector was as under-invested as it is now -- at the end of Q2 2003 and Q4 1999.  Both marked the beginning of extended periods of both outright strength and relative outperformance by Industrials.   Our Sector Rotation Model upgraded The Industrials Sector to outperform for May, from market perform during April.

Chart 3

Chart 4

Last week, we said: "...our Near Term "Keys" are again split between Positive and Negative Factors while the Intermediate Term "Keys" are unanimously Negative.  This indicates an uncertain near term outlook within a larger bearish environment.  However, of these Near Term Factors, the most important ones are; 1) the US stock market, which has been inversely correlated to long term US interest rates since December 2006 and is overdue for a decline, and 2) near term oversold conditions in long dated US Treasury prices while they are positioned just above major support.  The latter establishes ideal conditions for at least a near term rebound which, per the correlation, should coincide with a decline in US equities.  However, it would take expanding open interest in the T-Bond contract on rising prices to indicate that investors have the bullish conviction necessary to fuel a rally, and a positive shift in near term momentum to confirm that a rally is underway."

This week, our Near Term factors move to a decidedly Positive bias (from a more neutral one last week) while Intermediate Term factors remain unanimously Negative.  Long dated US Treasury prices remain positioned right on top of major underlying support levels while both oversold and under-loved by investors, -  which establishes ideal conditions for at least a near term rally.  Moreover, both intermarket (the US and Japanese stock markets) and intra-market (the NOB Spread) relationships corroborate the likelihood of at least a near term rally from here.  However, it would take a positive shift in near term market momentum on expanding open interest in the T-Bond contract to confirm that this potential rally has begun, and has the necessary bullish conviction to sustain itself.  Until then, long positions are risky and may be premature.

1. T-Bond Open Interest (Measuring Investor's Trend Conviction): NEAR TERM BEARISH FOR PRICES.  Total open interest in the CBOT T-Bond contract stabilized last week, along with the price of the contract, and actually expanded aggressively on Friday (by 11,576 contracts according to preliminary data).  This indicates that futures traders are no longer dumping long positions as they had been doing since mid April, and have actually added some new bullish positions going into the weekend. However, through Friday, total open interest is still slightly (1,700 contracts) below its 10-day moving average.  It would take an expansion in open interest appreciably back above its moving average this week to indicate that enough near term bullish conviction has come back into the marketplace to sustain a rally.
    

2. Market Momentum: NEAR TERM, INTERMEDIATE TERM BEARISH FOR PRICES.  Through Friday, both near term daily and intermediate term weekly momentum remained negative (bearish) in 5-, 10- and 30-year US Treasury prices. It would take a positive shift in near term momentum to indicate that at least a corrective rebound has begun.
    

3. Major Underlying Support:  NEAR TERM BULLISH FOR PRICES.  Several US Treasury-related securities in the 10- to 30-year maturity category are testing major price support, and coincident major yield resistance.  This marks a major inflection point in these assets, one which is likely to become the starting point for the next sustainable trend.  How the market reacts to them over the next few weeks will indicate the direction of this upcoming trend.

   • CBOT T-Bond contract (US):  122-31 to 121-25 underlying support represents the 200-day moving average (122-31), the 61.8% retracement of the October to December rally (122-07) and the September 2008 peak (121-25).  

   • CBOE 30-Year T-Bond Index (TYX):  38.25 to 39.44 overhead resistance represents the 200-day moving average (38.37), the October 2008 low (38.84) and the 61.8% retracement of the June to December 2008 decline (39.44). 

   • iShares 20+ Year Treasury Bond Fund (TLT):  101.42 to 98.89 underlying support represents the 200-day moving average (101.42), the September 2008 peak (100.86) and the 78.6% retracement of the November to December 2008 rise (98.89).  This level was broken last week.

   • iShares 10-20 Year Treasury Bond Fund (TLH):  112.23 to 110.60 underlying support represents the September 2009 benchmark high (112.23), the 200-day moving average (111.42), and the 61.8% retracement of the November to December 2008 rise (110.60).  This level was broken last week.

   • The Yield of the 10-Year Treasury Note:  3.26% to 3.34% overhead resistance represents the 200-day moving average (3.21%), the 61.8% retracement of the October to December 2008 decline in yields (3.31%) and the the March 2008 yield low (3.34%).

   • CBOE 10-Year T-Bond Index (TNX):  31.99 to 32.88 overhead resistance represents the 200-day moving average (31.99) and the January, March and September 2008 lows (32.88). 

   • iShares 7-10 Year Treasury Bond Fund (IEF):  92.75 to 91.77 underlying support represents the 200-day moving average (92.75), the March and September 2008 benchmark highs (92.59), and the 61.8% retracement of the October to December 2008 rise (91.77).
      

4. Intermarket Analysis (US equity prices): NEAR TERM BULLISH FOR PRICES.  The yield of the 10-Year US Treasury Note has been 86% positively correlated to the S&P 500 since December 2006 as investors have been interpreting the level of US equity prices as a barometer of US economic health.  In our US Stock Market section above, we point out favorable conditions for a near term decline in US equity prices.  If this decline materializes, and the 27-month relationship between US equity prices and US interest rates remains intact, then this should put near term upward pressure on long dated Treasury prices.
    

5. Intermarket (The Nikkei 225 Index): NEAR TERM BULLISH FOR PRICES. The Nikkei 225 has become technically overbought on both a monthly and quarterly basis while testing overhead resistance at its November and January highs -- which establishes ideal conditions for at least a near term decline in the index.  This is important to US Treasuries because of the tight and stable 87% positive correlation since 1991 between the Nikkei and the yield of the 10-Year Note.  If the Nikkei declines from here as expected and this 17-year relationship remains intact, then long dated US Treasury prices should rise.
    

6. Intra-market Analysis (The NOB Spread):  NEAR TERM BULLISH FOR PRICES.  The NOB Spread  is 10-Year Notes over T-Bonds (Notes Over Bonds, blue line in upper panel of Chart 5), and is a coincident or leading indictor of market direction in long-dated Treasuries. More specifically, as the NOB spread narrows long-dated Treasury prices rise, and as it widens Treasury prices decline.  Due to recent widening, the spread is now closing in on a test of a multi-year wide extreme (the 10-Year Note trading 1 22/32nds below the T-Bond, green highlights), one which had previously coincided with or led important bottoms in long dated US Treasury prices in January 2000, March 2002, August 2003, May 2004 and October 2008.  These data suggest that both 10- and 30-year Treasury prices are either at or near another equally significant bottom now.
    

7. Investor Sentiment:  NEAR TERM BULLISH, INTERMEDIATE TERM BEARISH FOR PRICES.  Through Friday, the latest data continues to show a strong bias towards the likelihood of continued overall weakness in long dated Treasury prices through the end of Q2 2009.  However, some measures indicate favorable conditions for a more near term rebound in prices first.
    

8. Overbought/Oversold: NEAR TERM BULLISH, INTERMEDIATE TERM BEARISH FOR PRICES.   US Treasury prices across the yield curve remain technically oversold from a near term monthly perspective, but are still in the process of working off December overbought extremes from an intermediate term quarterly perspective.  Combined, these conditions indicate a favorable environment for a multi-week rally now, within the larger December decline.
    

9. Seasonal Trend: NEAR TERM BULLISH FOR PRICES.  May is the 5th seasonally strongest month for the yield of the 10-Year Treasury Note since 1957.  It represents the first of a modest two-month seasonal setback from April (and a coincident rebound in prices) which is the strongest month for yields during this 51-year period. 
    

10. Credit Spreads:  INTERMEDIATE TERM BEARISH FOR PRICES.  During the past week both the 10-Year TIPS Spread (which indicates the market's expectations for consumer price inflation 10 years from now) and the Implied 5-Year     Forward Inflation Rate (the market's expectations for the five-year period beginning five years from now) have moved to their widest levels (indicating increasing inflation expectations) since November 2008, when each measure was essentially pricing in zero inflation five to ten years from now.  This recent widening is one indication that investors may be returning to a more reasonable outlook for inflation over the next five to ten years, one which would be consistent with an intermediate term rise in US interest rates from their current historically low extremes. 

Last week, we said: "...all of our "Keys" except for one are situated in the Near Term Positive or Intermediate Term Negative categories.  Of these Near Term Positive Factors, the most immediately influential are likely to be the US stock market (specifically the NASDAQ 100 and PHLX Semiconductor Index) and the COMEX copper contract, all which are currently testing major overhead resistance at their 200-day moving averages.  Both the US stock market and copper prices are amid ideal technical conditions for a decline so, considering their relationships with the US currency as detailed in Keys #3 and #4, this should help to trigger a coincident rally in the greenback.  More Intermediate Term Factors, however, remain strongly Negative." 

This week, we once again see a strong bias toward Near Term Positive and Intermediate Term Negative factors for the US currency, with the exception being Negative near term market momentum.  This negative momentum indicates that the market has not yet confirmed the near term Dollar strength that our list of Near Term Positive factors suggest is imminent.  Of these positive factors, the Dollar's intermarket relationships with US equities and US interest rates may be the most influential of all as these three assets have been closely correlated to one another for the past 12 to 18 months, driven by flight-to-perceived safety investor asset flows following the October 2007 US stock market peak.  A decline in US equities and/or a rebound in US Treasury  prices, both which are amid ideal technical conditions to take place, should boost the Dollar this week, but a positive shift in near term momentum would be necessary to confirm that a rally  in the US currency is underway.

1. Market Momentum: NEAR TERM, INTERMEDIATE TERM DOLLAR BEARISH.  Through Friday, near term daily momentum had turned negative (bearish) in the US currency, while intermediate term weekly momentum remained negative.  It would take a positive shift in near term momentum to indicate that the rebound the greenback is due for has begun.
    

2. Underlying Support: NEAR TERM DOLLAR BULLISH.  The US Dollar Index is positioned just above major underlying support at 84.78 to 83.41 -- which represents the July 2008 uptrend line (84.78), its 200-day moving average (83.74) and the 61.8% retracement of the index's December 18th to March 4th rise (83.41).   This support represents a major decision point for the US currency, one that must hold for its August 2008 major uptrend to remain intact.  (Note: The US Dollar Index is an index of the exchange rates of six non-US currencies versus the greenback that is heavily weighted toward Europe.)
    

3. Intermarket Analysis (US equity prices) NEAR TERM DOLLAR BULLISH.  The  S&P 500 has been 85% inversely correlated to the US Dollar Index since US equity prices peaked in October 2007, and 86% inversely correlated since January 2009,  as investors have viewed the US currency as a relatively safe place to hide when global stock market prices are declining.  In our US Stock Market section above, we point out favorable conditions for a near term decline in US equity prices.  If this decline materializes, and the 17-month relationship between US equity prices and the US Dollar Index remains intact, then this should put near term upward pressure on the US currency. 
    

4. Intermarket Analysis: (US interest rates):  NEAR TERM DOLLAR BULLISH.  The yield of the US 10-Year Treasury Note has been 68% inversely correlated to the US Dollar Index since January 2008 (Chart 6) due to the flight-to-perceived-safety rush into both US Treasuries and the greenback as global stock market weakened.  In our US Interest Rates & Treasuries section above, we point out favorable conditions for at least a near term rebound in long dated US Treasury prices.  If this rebound takes place and this intermarket relationship remains intact, than the US Dollar should also coincidentally rise.
    

5.  Intermarket Analysis (copper prices): NEAR TERM DOLLAR BULLISH.  Copper prices are often viewed by investors as a measure of both economic demand and inflationary pressures.  As a result, they have been 65% inversely correlated to the US Dollar Index since 1989, and 74% inversely correlated over the past decade. Since mid April the the COMEX copper contract has been testing (and thus far holding) major overhead resistance at its 200-day moving average (at $2.14 per pound as of the close on Friday) while technically overbought.  This establishes ideal conditions for copper's larger August 2008 downtrend to resume IF still valid.  Assuming  that this 20-year relationship remains intact, a decline in copper prices should coincide with a rise in the US currency.
    

6. Overbought/Oversold: NEAR TERM DOLLAR BULLISH, INTERMEDIATE TERM DOLLAR BEARISH.  Through the end of last week, the US Dollar had become technically oversold versus both Europe and Japan on a near term monthly basis.  However, the greenback is still technically overbought from an intermediate term quarterly basis.  This suggests favorable conditions for a near term rally now or soon, within a larger intermediate term decline.
    

7. Investor Sentiment: INTERMEDIATE TERM DOLLAR BEARISH.  The latest professional and retail investor sentiment data almost unanimously indicate favorable conditions for an  intermediate term decline in the US currency.
    

8. Seasonal Trend: INTERMEDIATE TERM DOLLAR BEARISH.  May is the second of a four-month period of modest but gradually-increasing seasonal weakness for the US currency versus Europe that extends through July.
    

9. Intermarket Analysis (the Australian Dollar):  INTERMEDIATE TERM DOLLAR BEARISH.  The Australian Dollar has had a tight, stable positive correlation to the CRB Index (85% over the past decade) because of Australia’s commodity-driven economy, and the CRB Index has been 69% inversely correlated to the US Dollar Index over the past 17 years.  Thus, a strengthening  Aussie should be a negative for the US currency.  The Australian Dollar contract confirmed an intermediate term bottom in mid April at the late October 2008 and early February 2009 lows  -- which portends an eventual 14% rise versus the greenback from Friday's closing level.  Assuming  that this rise takes place, per the aforementioned relationships it should coincide with both rising commodity prices and a declining US currency.

Chart 6