By Tomi Kilgore
Traders experienced a severe case of whiplash this week, as
markets of just about every stripe staged sharp reversals following
reassuring comments from Federal Reserve Chairman Ben Bernanke.
But with the exception of stocks, chart watchers believe the
reversals seen in markets such as Treasurys, emerging markets,
currencies and gold are temporary. It won't be long before previous
trends reassert themselves, they say.
"You're getting the excitement of one day, and one comment,"
says John Schlitz, chief U.S. market technician at Instinet.
For weeks investors had been fretting about the potential impact
of the Fed pulling back on its easy money policies. Those concerns
sent U.S. Treasurys prices sharply lower and yields rocketing. The
dollar surged, gold prices slid and emerging-market stocks also
sold off sharply. U.S. stocks, which had been record territory in
May, fell back from their highs.
Then, late Wednesday, the outlook changed. Mr. Bernanke soothed
concerns by saying that the Fed's highly accommodative policy was
needed for the foreseeable future. Overnight, markets changed
direction.
In the stock market, Mr. Bernanke's comments helped push the
S&P 500 to an all-time closing high of 1675.02 on Thursday. On
Friday, the index inched fractionally higher in midday trading.
Meanwhile, the yield on the 10-year Treasury declined to 2.552%
from 2.683% just prior to Bernanke's comments late Wednesday. Since
then, the iShares MSCI Emerging Markets (EEM) exchange traded fund
has surged nearly 4%, July gold futures rallied more than 2% and
the ICE U.S. Dollar Index slumped close to 2%.
When it comes to Treasury yields, the recent uptrend started in
early May, which was before Fed officials made it clear that less
stimulus was likely, in the form of reduced asset purchases.
Therefore, Mr. Schlitz sees no reason to think Mr. Bernanke's
comments will reverse the trend for good. "I don't believe just
because [Mr. Bernanke] says what he says, the yield is going to
unwind everything," he says.
The yield on the 10-year has been climbing sharply since hitting
a multi-month low of 1.614% on May 1. On May 21, the yield closed
at 1.944%. It was on May 22 that Mr. Bernanke sparked tapering
fears, after he indicated the Fed could start reducing the pace of
asset purchases over the next few months.
Bank of America Merrill Lynch technical strategist MacNeil Curry
says the yield on the 10-year could slip a bit further in the near
term, to key support at 2.463% to 2.372%. But he says the "larger
... trend remains intact." He sees the yield rising to an initial
target of 2.857% to 2.951%.
It's a similar story for emerging market stocks, chart watchers
say. Strategas Research Partners technician Chris Verrone says the
iShares MSCI Emerging Markets ETF could rise a touch more, but
believes the rally was just a temporary, countertrend bounce. "I'm
not too interested in chasing this bounce," he says. "It's one that
I'm still inclined to fade."
EEM was trading at $38.89 midday Friday, and was down 12% from
its mid-May high.
Both Mr. Verrone and Instinet's Mr. Schlitz see significant
resistance for EEM starting at the $40 level.
"There's really nothing in the charts to suggest the [EEM] rally
is anything more than just a short-term bounce," Mr. Schlitz
says.
In currencies, the dollar fell on Mr. Bernanke's remarks, and
the euro rose to a three-week high above $1.32. The currency pair
was last at $1.3054.
Mr. Curry says dollar weakness will prove "temporary and
corrective before the larger [bull] trend resumes." His target for
the euro against the dollar remains around $1.2457.
And despite gold's jump, the futures price remains well below
the widely watched 50-day moving average, which technicians use as
a gauge for the short-term trend, at $1,358.98. July gold futures
were recently at $1,276.30 an ounce.
But when it comes to U.S. stocks, it's a different story. The
post-Bernanke rally is expected to continue. The basic reason,
technicians say, its that U.S. stocks were already on an
established trend higher before Mr. Bernanke made his comments.
The Russell 2000 small-capitalization index reached new record
highs last week, and the Nasdaq Composite broke out to a fresh
decade high on Tuesday, suggesting the larger-cap indexes were
likely to follow. On Friday, the Nasdaq was up 0.1% at 3583 and the
Russell 2000 rose 0.3% to 1036.
"Secondary issues [like small caps] are leading, and I believe
that's important," says Strategas's Mr. Verrone.
"The more stocks that are rising, the better it is for the
overall trend, he says.
Write to Tomi Kilgore at tomi.kilgore@dowjones.com
