ADVANCE-DECLINE LINES TURN DOWN -- THE DOLLAR IS TESTING ITS 200-DAY AVERAGE -- S&P AND NASDAQ ARE STALLED AT LONG-TERM RESISTANCE -- RISING RATES HURT FINANCIALS -- MONEY IS MOVING INTO CONSUMER STAPLES, ENERGY, AND HEALTHCARE
RALLY MAY BE STALLING... The major downtrend in the U.S. Dollar Index was interrupted during first quarter when the greenback put in an intermediate term bottom. It moved over its 50-day average in mid-February which confirmed that the immediate trend had turned higher. As Chart 1 shows, however, the Dollar Index is meeting resistance at its (red) 200-day moving average. As is usually the case in chartwork, that's an important test. A decisive close above that long-term resistance line would suggest that the major downtrend may indeed be reversing. If this is just an intermediate rally in a longer bear market (which has been my view), this is where the dollar should start to weaken again. The chart also shows potential chart resistance at the low formed last June near 92. The dollar rally has played an important role in the selloff in commodity markets over the past few months -- especially gold. The rise in the dollar has also been caused by U.S. interest rates which are trading at eight-month highs.
Chart 1
LONGER-TERM VIEW OF MARKET... It's important not to lose sight of the big picture. That's why we're showing a three-year weekly bar chart of the S&P 500. The first thing that jumps out is that the S&P rally has stalled just below major chart resistance formed during the first half of 2002. Secondly, the 14-week RSI line has turned down from overbought territory over 70, and has broken its uptrend line extending back to October 2002. Thirdly, the weekly MACD lines have turned negative for the first time since the fourth quarter of 2002. Then there are percentage moves to consider. The S&P move to 1150 recovered 50% of its 2002 low at 768, which is typical of a cyclical bull market. The S&P also retraced 50% of its 2000-2002 bear market. With so many longer-term technical factors coming into play at the same time, it's no wonder that the market rally stalled. The bigger question now is whether the market is just consolidating within its uptrend or in the process of peaking. We're not sure yet, but the weekly chart does explain why the market has been on the defensive for the last three months. One of the keys we'll be watching is the ability of the S&P to stay over its (red) 40-week (200-day) moving average. Chart 3 shows that the Nasdaq Composite Index (which stalled at its 2002 peak near 2100) is already threatening its 40-week (200-day) moving average. Any decisive break of that long-term support line would signal a turn for the worse in the Nasdaq and the rest of the market. Sector rotations since January also show a market that has turned defensive. Technology stocks have been the weakest sector, while consumer staples and energy have been the strongest. That's a bad combination for the market. So is the recent runup in interest rates and relative weakness in financial shares.
Chart 2
Chart 3
RISING RATES HURT FINANCIALS... Usually when a market is peaking, we see it first in rate-sensitive stocks. That's especially true if interest rates are rising, which they are. That's another reason why the recent breakdown in financial shares is troubling. Especially noteworthy is the sharp drop in the relative strength line of the Financial ETF divided by the S&P 500 starting in mid-March. Heavy volume during the selloff isn't good either. That suggests that, contrary to what the economic community is telling us, the market is really worried about rising rates. If the market is going to do better from here, it's going to need more help from the financial stocks which are generally considered to be leading market indicators.
Chart 4
WHERE THE MONEY IS GOING... One need only to look at the Stockchart.com performance charts to see where the money is going in this generally defensive market. The three top sectors on Friday were energy, consumer staples, and healthcare. That's been pretty much the same pattern for the the month of April. Chart 5 shows the Consumer Staple ETF (the top sector for the week) challenging its March high and showing superior relative strength. Over the past month, the weakest sectors have been financials, materials, and technology. Within the technology sector, semiconductors turned in the weakest performance. Small cap stocks also had a bad week. Money is leaving the more volatile small cap and tech areas and moving into bigger and safer stocks. That's not a bad idea in a climate of rising rates and a stock market that's technically vulnerable. It's also worth noting that the earnings season was a big surprise on the upside. Fundamental analysts keep talking about the great earnings. When a market falls on great earnings, it's sending us an ominous message. [See John's Latest Performance Chart for April's defensive sector rotation].
Chart 5
AD LINES TURN DOWN ... It's been awhile since we've talked about the Advance-Decline lines in the various markets. The two charts below show why we're showing them now. The NYSE Advance-Decline line has fallen to the lowest level in four months. This is its weakest showing since the market rally started last March. The Nasdaq AD line looks even worse and has broken its 200-day moving average. That confirms that most of initial technical damage came from the Nasdaq. Trouble is it's now spreading to the rest of the market. All the more reason to be defensive at this point.
Chart 6
Chart 7
