NEW YORK ( TheStreet) -- U.S. financial markets look to be reaching a breaking point leading into this week of trading. Markets traded with wide intraday price swings last week, which signals indecision of future price direction among investors.
Below are a couple of charts showing intermarket relationships that should drive market sentiment over the weeks leading up to September, despite what is happening in Japan.
The first chart is of Guggenheim S&P 500 Equal Weight (RSP) over SPDR S&P 500 (SPY) . This pair measures market breadth. When an index moves higher and a majority of the stocks in that index follow, this pair pushes upward as well.
In late July, market breadth broke to new highs, signaling bullish sentiment as the S&P 500 rose above the 1700 level.As the pair has pushed higher with extreme velocity, some analysts have conceded that equities may be overbought. Looking at just charts of U.S. equity indexes, most have begun to consolidate at their highs. Based also on the other charts below, it is not unreasonable to think that equity indices will pull back in the near term. The U.S. yield curve and equity markets have raced higher together, as an improving economic environment and normalization of yields have pushed funds into equities and out of long-dated bonds. As equity markets approach a rollover, investors have begun buying up long-dated bonds again in an effort to hedge their downside. The chart below shows a break in the curves uptrend line as represented by iShares Barclays 1-3 Year Treasury Bond (SHY) over iShares Barclays 20+ Year Treasury Bond (TLT). The trend has not been completely compromised, at this point, but as bidders increase for long-dated treasuries, this will pull money out of equity markets and cause a correction lower in equity price levels. The last chart is of Financial Select Sector SPDR (XLF) over Guggenheim S&P 500 Equal Weight. Financial stocks have been a market leader as yields have increased and the economy has improved. Bank's profit margins increase as the yield curve steepens. Financial institutions are better able to buy in the short term at lower rates than they lend over the long term. This leads to such market leadership. Since peaking in late July, the financial index has begun a drastic fall downward. This is overall bearish for the economy and signals gloomy times ahead for riskier financial assets. Unless a reversal in this relative downtrend takes place, markets will not have the leadership to make a meaningful jump higher to record highs. At the time of publication, Sachais had no positions in stocks mentioned. Follow @AndrewSachais This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV