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.

About Chris Ciovacco 73 Articles

Affiliation: Ciovacco Capital Management

Chris began his investment career with Morgan Stanley in Atlanta in 1994. With a focus on global macro investing, Chris uses both fundamental and technical analysis to assist in managing risk while looking for growth opportunities around the world in all asset classes.

Chris graduated from Georgia Tech with Highest Honors earning a degree in Industrial and Systems Engineering in 1990.

He is now the Chief Investment Officer at Ciovacco Capital Management.

Visit: Ciovacco Capital Management

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