The issues are becoming clearer

A host of retailers (Wal-Mart among others) and several of the major tech players (Google, Dell and Intel) have raised concerns regarding slowdowns in global consumer markets. We all have heard the sounding of the alarm, but like the passengers on the deck of the Titanic some of us are thankful for the extra ice for our happy-hour drinks.

US Treasury yields have broken through technical resistance (which was about 4.65 percent on the 10-year TNX). By the end of the week, the 10-year US Treasury (TLT) had fallen -1.9 percent to 89.33 and yields had risen +11 basis points from 4.57 percent to 4.68 percent.

Now into a new trading range, these rates could escalate.

Bonds in the US sold off more this week as yields lifted by +2 basis points up to 2-year paper, and up a startling +11 bp on the 10-year TNX and +13 bp on the 30-year (TYX).

So it's a case of rising rates: rising in the US, rising in Europe, and soon to rise in Japan.

This is now the story you have to watch closely.

There will be a point, soon I think, called the tipping point.

Given the massive credit balloon in the US and in many other countries, a continuation of the rising trend in interest rates, or any pullback in the growth of the global money supply, would slow or halt the economic growth in the US and possibly lead to a domestic and international recession.

In such a case, there are too many industries in the US - from commercial lending banks, income trusts and REITs, to real estate developers, oil producers, retailers etc - that would suffer immensely.

If that were to happen, their shares would begin to fall in price. The Bear Market of 2006 would begin.

Observers who witnessed the selling in the big caps in New York on Friday at about 2:00pm ET say that process could have begun. Clearly, there is change in the wind, and it's not just the passing of winter into spring.

The US economy may be threatened by a flat or inverted yield curve or it may not. But, for sure, the image of a great equity bear is now on the horizon, and will come closer if/as and when treasury yields move higher.

At this point, either corporate dividends are raised significantly this quarter or equity prices will fall.

This week was a strange one as Talking Heads tried to convince us that Intel and Dell are now irrelevant because laptops have taken over from desktop PC's, and that Google is merely suffering from one-trick pony syndrome in a rapidly maturing advertising market.

At the open on Wednesday, there was a significant rally that goosed the chip stocks and NASDAQ, but alas along came Friday when share prices headed in the opposite direction.

Intel was guided down for the next quarter, so the Talking Heads told us the new boy in town is Advanced Micro Devices. Well look at what happened to AMD on Friday.

Bam! AMD went down -4.4 percent on Friday, right after reaching an 80 RSI reading on the 30-Minute and Hourly Data charts. RSI, by the way, stands for Relative Strength Index, which is a popular technical indicator.

Through the week, the big story was how much Advanced Micro Devices was eating Intel's lunch in the semiconductor industry, but by the close on Friday, INTC had dropped -0.20 percent, from $20.65 to $20.32, while AMD plunged -2.54 percent, from $40.54 to $39.51.

So traders ought not to trade on the basis of stories.

After the close on Friday, Research In Motion (NDQ: RIMM) had received judicial approval of a "full and final" $612.5 million settlement of their intellectual property lawsuit. That is a fact.

All week, the reporters had been playing the PALM card, but on the news from the courthouse, RIMM jumped over +10 percent in after-hours trading.

The Dow 30 and S&P 500 were down very little week-over-week. But, for the Dow Index, it was 19 stocks down and 11 up. A week earlier it had been 18 down and 12 up.

So the broad market indexes contradict the internal market action.

As the US consumer price inflation data was reported, it was called "benign" and "tame" by reporters, but traders were not fooled. As I noted earlier, it was a tough week for bonds.

Commodities were higher this week, with higher inflation data and growth in money supply, and terror on the rise. Most closely scrutinized, crude oil was up on the week to $63.67. Gold was also up at $565.26.

But gold was crushed on Friday as well as Monday, so the middle of the week, particularly Tuesday and Thursday, it was strong.

The US and Canadian gold miners peaked in January. Trading is volatile, although if the bullion (say $Gold near futures) were to rally to $575, the share prices of the miners would undoubtedly follow.

In looking at the individual sectors through the lens of an ETF, there were lots happening.

My best advice for the XLE (energy sector ETF) is to continue selling into rallies as reflected by the rising RSI on the Daily Data. But note that the Weekly RSI has turned moderately negative, so any sell-off in the Crude Oil markets early this week could turn the currently positive RSI on the Daily XLE data to a negative, which would lead to a pull-back in this sector.

This week XLE closed up +0.93 percent W/W to 54.13. Next to SMH (chips), it was next strongest. But on Friday, while SMH broke down considerably, XLE held its ground.

The 40wma (40-week Moving Average) for XLE is presently 50.01 and rising, so if XLE drops below that technical support then it's probably wise to start a larger scale sector selling program, rather than the small degree of scaling back we have cautioned on.

Selling would include the specialty plays like the Canadian oil sands and the North American pipelines, drillers and oilfield services companies. Some of these companies are structured with relatively heavy debt, which will weigh on profitability (and further restructuring possibilities) going forward should interest rates (and bond yields) continue to rise.

At this point, the economy is strong enough and interest rates low enough and crude oil prices high enough to sustain trading interest on the long side, particularly in energy companies that are doing share buybacks and/or increasing dividend payouts substantially.

With concerns over the Middle East and Venezuela and Nigeria, the Canadian oil sands companies are getting lots of Talking Head coverage. This is a no- brainer as long as crude oil does not drop into the 40's (presently $63.67) or the 10-year US Treasury paper (TNX) does not move from 4.68 percent to say 5.25 percent or higher.

The XLB (Basic Materials sector ETF) was flat this week, closing at 31.74, up just +0.06 percent. That would have been more than made up by Friday's gain of +1.7 percent in Alcoa (NYSE: AA).

This sector rallied from the outset on Wednesday.

Mostly the strength is coming from the metals, but the chemicals are starting to look stronger, and will stop their descent when crude oil prices come down below 60.

Last week in my blog I noted that the Industrial sector had enjoyed a couple of good weeks, "but maybe enough is enough for XLI. The RSI data is looking a little toppy."

This week XLI (Industrial sector ETF) was up +0.24 percent, but all of that came Friday. And Friday after was not kind to the Broad Market Bulls.

XLI closed at 32.74, which is all of 8 cents higher.

Dragging this group down were UTX (down -1.75 percent), MMM (down -1.39 percent), and BA (down -1.24 percent, all W/W. And if you were closely observant, you will have noticed that the selling started about 2pm ET Friday on the NYSE.

The XLY (Consumer Discretionary sector ETF) was up 3 cents or +0.09 percent to 33.48 this week.

If you check the long-term charts you will see that XLY has been in a bear phase since the end of Dec-2004 (about $35.50) – over 14 months. Moreover, for over 3˝ months, XLY gets knocked down every time every time it tries to climb above $33.75.

The growth of the sector 800-pound giant (Wal-Mart) is taking place outside the US and virtually – over the Internet. But in the US, consumer spending is constrained by an overload of debt, rising prices, interest rates and insufficient income to maintain the lifestyle to which Americans have become accustomed.

So for eight of the past ten months they have been dipping into savings. And for most of that time, they have been watching weakness creep into a once robust housing market.

The XLP (Consumer Staples ETF) has basically done zip since January 2005. This is the group that includes MO, KO and PG that has to increase dividends or else it will soon fall out of favor.

This week XLP dropped -0.55 percent to $23.55. PG was the main reason, going down -3.0 percent W/W.

The early rally on Friday in XLP cratered in the last hour. That could be a sign of deception, getting ready to rally on Monday, or it could be (what I think is more likely) that $23.70 was the tipping point for XLP.

There is no safe haven (even in consumer staples) if interest rates rise unless dividends also rise commensurately.

The IYH (Healthcare ETF) was down -0.94 percent to $64.29. There was extreme market weakness in the last hour of trading on Friday for this sector. We'll have to see if the selling continues on Monday.

The XLF (Financials ETF) was down sharply this week. XLF dropped -1.12 percent W/W to 32.52.

The big losers of the financial sector were AIG (down -2.22 percent), AXP (down -2.04 percent) and C (down -1.99 percent) W/W.

Since C and AIG have a huge market cap, the total amount of USD lost in portfolios this week was big.

If the relatively small caps of the important Dow 30 index are down or up big, I don't pay as much attention as if the C, AIG, WMT, GE, XOM group are moving fast.

Interesting to me is that the very low RSI on the Hourly Data for XLF, which was reached mid-day Tuesday (at about $32.60) was useless for a technical rally. When it did that twice in February, there was a nice next day rally.

But not this time. And when there was a minor rally on Friday through the day, the last hour caved in for the XLF.

The yields on the US Treasury's have been rising, and did break out on Friday to short-term cycle highs. That's one source of worry for the financial sector bulls, and generally for the broad market bulls.

The SMH (Semiconductor technology ETF) may have been hot a week ago, and for the early part of this past week. But those traders who jumped in pre- open on Wednesday may not be so happy now.

Yes, SMH was up +2.68 percent on the week, to close at $37.94. But after the first two hours of trading on Wednesday morning, the SMH actually sat at a lower level.

So just as I thought; this was an engineered rally, which served to pump the current favorites in the sector – taking the RSI to 90 on the Hourly Data – and a lot of distribution, then pop went the balloon.

Based on a strong Wednesday, the IYZ (Telecom Services ETF) was up +0.48 percent W/W to $25.16. AT&T (NYSE: T), which is the old Southwest Bell, was up on the week +1.52 percent.

Last week I wrote: "A week ago, IYZ was up +2.27 percent W/W, and this week it was up +4.03 percent, closing at 25.31. I am amazed… but IYZ needs lower interest rates or a stronger economy for the long-term and short-term, I think I saw it peak on Friday afternoon. This week, IYZ went down -1.07 percent to 25.04."

But look at Friday: T was down -1.03 percent and VZ dropped -1.24 percent on the day, which was a lot worse than the Dow or the S&P 500 indexes.

Today, T announced a $65 billion bid for Bell South, which will be the big story of the week.

The XLU (Utilities ETF) was down -0.71 percent W/W to $32.30.

Last week I wrote: "After a huge move in the first hour on Tuesday, the rest of this week looked to me like XLU could not break to new high ground. And now that the Daily RSI is extended on the upside at 75.5, it appears that XLU may sidetrack or start to move down."

So it moved down.

The equity market in the US looks like an aged bull about to be clawed by a bear.

Canada, on the other hand, can keep a remarkable bull run going as long as global commodity prices continue higher. Yes, that presents problems for Bank of Canada governor David Dodge, because a strong commodities market means a strong Canadian Dollar, which is a negative for manufacturing and tourism.

But that's the thing about capital markets; there is never a point where things stand still and where all the players are happy.