MARKET CONTINUES TO WEAKEN -- DAILY MACD LINES TURN DOWN -- RETAILERS AND REAL ESTATE HAVE A BAD WEEK AS BOND YIELDS RISE AND CRUDE HITS NEW RECORD
S&P CONTINUES TO WEAKEN -- MACD TURNS DOWN ... The market's short-term picture continues to weaken. Yesterday I wrote about the MACD lines for the S&P 500 being on the verge of turning negative. They did that today for the S&P and several other major market averages. That signals the start of a short- to intermediate-term correction. For the S&P 500 SPDRs (Chart 1), the first significant test of support will come around the 122 level. Two peaks were formed around that level (March and June) prior to July's upside breakout. On pullbacks, an index is supposed to find support along old breakout points. Another potential support level is the rising 50-day moving average. The market's overbought condition, combined with the fact that August is usually a weak month, is enough to raise the market's risk level for the balance of the summer. Chart 2 shows the Dow Diamonds falling back below their June high at 105 on rising volume. That's another caution flag.
Chart 1
Chart 2
NASDAQ BREAKOUT IN DOUBT ... A strong July rally ended last week with the Nasdaq Composite Index breaking through its early January high to reach a new record. Unfortunately, that upside breakout is now in doubt. The reasons why are shown in Chart 3. Most important of all is the fact that the Nasdaq wasn't able to hold the breakout for two successive weeks. Today's close at 2177 puts the Nasdaq back below its early 2005 peak at 2191. In addition, the 9-day RSI has started to drop from overbought territory over 70 (blue arrow). More importantly, the daily MACD lines have turned negative. I pointed out yesterday with the S&P 500 that the inability of the MACD lines to exceed their June high (first red arrow) formed a negative divergence. Today's downside crossings by the MACD lines (second red arrow) has turned the short-term trend negative. It should be noted that the weekly and monthly MACD lines are still positive. So it's too soon to call this a major top. It's not too soon, however, to take a more defensive posture in the Nasdaq and the rest of the market.
Chart 3
RETAIL AND REAL ESTATE LOSERS ... The market has some other problems to deal with. One is rising bond yields and the other is a new record close in crude oil and gasoline. Another is the fact that seasonal trends have turned less friendly. August is usually the summer's weakest month and September isn't any better. That's a lot for an overbought market to deal with. The market also lost some leadership this week from the retail and housing sectors. Nordstrom was one of the hardest hit among the retailers. The stock fell below its 50-day average on heavy volume. Its relative strength ratio fell as well. Today's big jump in bond yields took a heavy toll on real estate and housing stocks. Centex broke its 50-day line on rising volume. Its relative strength line has also turned down. Equity Office Properties was one of the biggest REIT losers. Its chart looks similar to the other two. It's pretty tough for the market to lose those kinds of former leaders. Their fall this week may also be an early sign that rising bond yields (and rising gasoline prices) are starting to exert a negative influence on the market.
Chart 4
Chart 5
Chart 6
MICROSOFT IS A BIG WINNER ... While the week's worst sectors were rate-sensitive categories like financials, housing, real estate,and utilities, the two strongest sectors were energy and basic materials. That was the result of rising commodity prices and a weaker dollar (which may have also contributed to rising bond yields). Newmont Mining was the strongest stock in the materials group and reflected a surge in gold-mining stocks. There were some notable stock winners outside of those sectors however. One of them was Microsoft. The weekly bars show the software bellwether closing at a three-year high. And it did so on heavy volume. That's a bullish combination. It's relative strength ratio has just broken a down trendline starting from the end of 2002. That's the first sign of leadership from MSFT in nearly three years.
Chart 7
VACATION WEEK ... I'll be on vacation next week to do a little traveling. While I'm gone, the folks at Stockcharts will be providing you with market commentary from some of our worthy contributors. I'll be back the following week.
