Hello [MM_Member_Data name=’firstName’],

Bond yields touched their lowest level of the year and the dollar’s value dipped against other currencies Friday after the nation’s job growth slowed more than expected last month. Stock indexes hugged close to their record highs.

I’m seeing increases vulnerability in the stock market at this time, due to overbought price levels and key blue chip sectors nearing the 50 day moving average to the downside.

Global Economy –  European stocks are up at a 2-week high. Global stocks rallied on optimism in the economic outlook ahead of Friday’s monthly U.S. payroll report.

European stocks also received a boost after a gauge of UK May construction activity expanded at the fastest pace in 17-months.UK May Markit/CIPS construction PMI unexpectedly rose +2.9 to 56.0, stronger than expectations of -0.5 to 52.6 and the fastest pace of expansion in 17 months.

Eurozone Apr PPI was unch m/m and up +4.3% y/y, weaker than expectations of +0.2% m/m and +4.5% y/y.

On the negative side is a -2.50% plunge in Jul WTI crude oil prices to a 3-week low on concern about abundant global oil supplies. EIA data Thursday showed U.S. crude production increased to its highest level in 2-years while OPEC May crude output rose +315,000 bpd to 32.21 million bpd, a 3-month high.

Improvement in the global economy has investors buying Japanese stocks as the Nikkei Stock Index rose to a 1-3/4 year high.

U.S. Economy – Employers added 138,000 jobs last month, short of economists’ expectations. The government also said that hiring was weaker in March and April than it had earlier reported, and pay raises remain middling with average hourly earnings up 2.5 percent over the past year.

Economists aren’t sure how much of the weakness in the report was due to seasonal issues, or whether it indicates a longer-term trend. Still, many say they don’t expect it to dissuade the Federal Reserve from raising interest rates again at its next policy meeting in two weeks.

The central bank has been trying to pull rates gradually off their record low following the Great Recession, and it has raised rates twice since December.

Market Sentiment – Bond yields touched their lowest level of the year and the dollar’s value dipped Friday after the nation’s job growth slowed more than expected last month.

Bonds are now officially overbought  – as 10 day RSI moves above 70 level. Bonds are technically in an interesting position, since the long term trend is bearish and the short term trend remains bullish.

This creates very low risk trade opportunities to the downside, especially in light of the fact that FED will more likely than not raise rates in the next few weeks.

june2bonds

Expect price to start reverting back down inline with the main trend in the near term, which will cause price to start trading lower.

The upside is limited and the odds are strong that over the next few sessions, we will see the main trend beginning to take control over the long bond once again.

Stock Market Analysis – Stocks are mixed with very little directional bias. Major blue chip sectors have been the weakest over the past month and I’m expecting minor pressure to increase, since markets are becoming more vulnerable at the current levels, especially without meaningful catalyst driving price higher.

june2bluechips

Techically, NYSE which tracks mostly large cap blue chip and industrial stocks is diverging from the 10 day RSI oscillator and is now approaching overbought price levels.

june2nyse

The blue chips remain vulnerable to downside pressure, especially if FED raises rates over the next few weeks, which remains highly probable at this time.

I’m not looking for massive corrective pressure since volatility levels remain near historic lows, which tells me that the most likey scenario is a pullback to the 50 day line, which will cause some degree of balance between the various sectors that are out of balance at this time.

One of the major factors that’s causing such strong distortion in the overall market is the strength out of tech, which has been causing bullish fund activity and overlaps the vulnerability we’ve seen out of the overall stock market.

june2qqq

When tech begins seeing downside, these vulnerabilities that I’m pointing out will become much stronger and that will cause blue chips to decline more rapidly, since there’s more weakness there.

Keep your eye on the SOXX index, since that’s the biggest catalyst in the tech right now and when price begins trading lower in the chip sector, I can assure you, that tech will suffer as a result and will begin pushing down on blue chips.

I will update you tomorrow as usual and keep your eye on tech and chips, since that’s what’s driving price higher at this time.

Roger Scott