DOW AND S&P 500 VIOLATE 50-DAY LINES -- RATE-SENSITIVE STOCKS LEAD MARKET LOWER -- LOSS OF SMALL CAP LEADERSHIP
FINANCIALS AND REITS DROP FURTHER... Last Friday I wrote about how the buildup of inflation pressures -- and the threat of rising long-term rates -- were combining to cause loss of market leadership in the financials and REITs. That negative trend continued today as both groups were among the day's biggest losers. Chart 1 shows the Financials Sector SPDR (XLF) falling below its late January low on another day of heavy trading. Its relative strength line has fallen to the lowest level in a year. REITs were also hit hard again today. The Realty Major iShares (ICF) tumbled on heavy volume after a failed test of its 50-day average and its mid-January peak. The REIT relative strength line peaked in December and has been dropping since then. Homebuilding stocks also fell on rising volume. That may be the market's way of telling us that it now expects higher bond yields. Today's dollar collapse -- and commodity price breakouts -- didn't help the interest rate picture any. That also explains why utilities were sold heavily today.
Chart 1
Chart 2
UTILITIES SUCCUMB TO RATE FEARS ... Utilities were the day's weakest sector. That's because they live and die with bond yields. With bond yields jumping again today, utilities were sold on heavy volume. Volume is the real key here. As the daily chart shows, the Utilities SPDR (XLU) hasn't broken any important support lines. But minor pullbacks don't normally take place on such heavy volume. Which leaves me to conclude that this is more than just a minor pullback. The 9-day RSI line has turned down from overbought territory over 70 and fallen under 50. That's usually a sign of more selling. The daily MACD lines have turned negative for the first time in three months. The XLU relative strength line appears to have turned down as well. It's not a good sign for the market when rate-sensitive stocks are leading it lower. That's because selling in rate-sensitive stocks is associated with rising long-term rates. Rising long-term rates are associated with rising inflation. And rising inflation is the usual result of a collapsing dollar and soaring commodity prices. Not unlike the action we saw today.
Chart 3
DOW AND S&P BREAK 50-DAY LINES ... The next two charts show the Dow Diamonds (DIA) and the S&P 500 SPDRs (SPY) closing under their 50-day averages. The fact that they did so on heavy volume makes the price breakdown even more serious. Both indexes now appear headed for a retest of their January lows and maybe even their 200-day averages. Those will be very important tests and will help determine if the cyclical bull market has finally peaked. Small caps had an even worse day.
Chart 4
Chart 5
Chart 6
LOSS OF SMALL CAP LEADERSHIP ... Chart 6 shows the Russell 2000 iShares (IWM) having an even worse day than the large caps. Its February rally fell well short of its late December high. That weak performance is reflected in its relative strength line which peaked in December and which has been dropping since then. Small caps fell on heavy volume today and suffered bigger percentage losses than large caps. Loss of small cap leadership is another potentially bad sign for the market. The list of falling leaders is growing -- first technology, now financials and small caps. Not very encouraging. Summing up, it was day of fairly dramatic intermarket moves starting with a collapsing dollar, higher commodities and bond yields, and ending with a falling stock market. As bad as the day was in stocks, I feel comfortable in saying that we weren't unprepared. Fortunately, the charts have been warning of the potential for today's intermarket developments, and I've been writing about those warnings. Thank God for charts.
