LARGE CAP STOCKS ARE LAGGING BEHIND -- YAHOO SELLS OFF -- MARKET ENTERS EARNINGS SEASON
LARGE CAPS NEED ANOTHER BREAKOUT... Earlier in the week I noted that small caps were leading the market advance, which is a good thing. For the uptrend to continue, however, the large caps have to confirm the upside breakout in the small cap stocks. Chart 1 shows the S&P 600 Small Cap Index hitting a new recovery high this week. Chart 2 shows that the S&P 500 Large Cap Index has yet to do the same. If you inspect the two uptrends from the March bottom, you'll see that both indexes have been moving up in lockstep. Each upside breakout in the S&P 600 has been confirmed by a similar breakout in the S&P 500. Until now. Although this isn't necessarily a serious problem, I'll feel more confortable when the S&P 500 (and the other large cap averages) hit new recovery highs as well.
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DISCRETIONARY SPENDING PICKING UP... Two groups that we like to see leadership coming from are technology and consumer discretionary stocks. Technology was the strongest market sector this week, which is a good sign. In Wednesday's update, I showed several individual technology stock leaders. Today, I'll be showing some leaders in the consumer area (which is mainly in retail). The first one is Lowes. The daily chart shows the stock rising above its May high to register an upside breakout. The weekly chart is even more impressive. It shows the stock breaking out to a twelve-month high. The weekly breakout also took place on rising volume, which is good.
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KOHLS RISES ABOVE 200-DAY LINE... Another retailer that had a good day was Kohls. The daily chart shows the department store stock breaking through its 200-day moving average. The big volume bars for the last two days are also impressive and reflects heavy buying. The weekly volume bar also looks impressive. The weekly price bars shows the stock finding support along the lows of the past two years.
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THE GENERALS RETREATED... The Dow isn't getting much help from its two generals -- General Electric or General Motors. Chart 7 shows GE having broken its 50-day moving average on increasing volume. That's not a good sign. The stock appears headed for a test of its May low near 27.5. That will be an important test for this market bellwether. Its falling "price relative" line (versus the Dow) shows that GE has been underachieving since May. General Motors has done much worse. GM remains well below its fourth quarter highs -- and hasn't provided any Dow leadership for the past year. The Dow could use a little more leadership from its two Generals.
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BOND YIELDS TESTING 200-DAY LINE... Long-term bond yields have been jumping over the past three weeks. The next chart shows the yield on the 30-year T-bond having reached its 200-day moving average. We're watching that test very closely. We've seen some heavy selling of global bonds over the past few weeks. As I said last week, there's good and bad news in that. Short-term, rising rates are probably good for stocks. Longer-term, they're probably negative.
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YAHOO SELLS OFF ON GOOD NEWS... Yahoo suffered some heavy selling this week despite a strong earnings report for the last quarter. That's what happens when a stock rises so fast that it can't satisfy market expectations. Yahoo has tripled since its fourth quarter low, and has doubled since its March low. The weekly chart shows a "double top" in its RSI line which is over 70. That's a sign of an over-extended stock that's due for a correction. The ADX line has also rising over 50. Although it hasn't turned down, an ADX level over 50 is another sign of an over-extended stock. The daily chart shows Yahoo gapping down this week on heavy volume. Why that concerns me a bit is that Internet stocks have been among the strongest technology groups. Any sign of a pullback there might be hinting that the technology rally is vulnerable as well to some profit-taking.
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SUMMER RALLY VERSUS EARNINGS SEASON... The heart of the summer rally usually kicks in around the July 4 holiday. We're in that time frame now. After July, however, the summer rally often runs out of steam. The market has also entered the earnings season. That's not a bad thing unless the market has already discounted some bullish numbers. That leaves a lot of room for disappointment -- as was the case with Yahoo. Historically, two of the best months for taking some profits are July and January. I'd be inclined to use rallies during July to take a little money off the table; or, as an alternative, use sell stop orders to protect existing profits.
