Italian Bonds/Economic Data/Materials Raise Caution Flag
Our models remain bullish longer-term, but we have some concerns on a shorter-term time horizon. The yield on a ten-year Italian bond has crept back up over 5%, a level which was last seen just prior to recent corrections/big drops in stock prices (see purple arrows below). Economic data has started to weaken relative to expectations in a similar manner to what we saw in spring 2011 (blue arrow below). These readings do not mean a correction is coming, but they tell us to pay attention. Note the S&P 500's performance after the blue and purple arrows below.
As we noted yesterday, materials stocks (XLB) are still contained within a two-month consolidation pattern. If the economic outlook is favorable, we would expect to see XLB break to the upside. If XLB can close above 37.65 in a convincing manner, it would alleviate some of our concerns relative to the market's short-term outlook. A failed XLB breakout or push below 36.50 would heighten our concerns.
Higher highs in stocks remain quite possible, but a weak push toward 1,430 could be met with resistance from sellers between Wednesday and Monday. Nothing too alarming has occurred yet, but enough to watch with a skeptical eye.
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Author: Chris Ciovacco
Chris Ciovacco
Ciovacco Capital
Management
Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.
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Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. CCM helps individual investors and businesses, large & small; achieve improved investment results via research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions.
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