SMALL-CAPS ATTEMPT A BREAKOUT -- TRANSPORTS SURGE IN JANUARY -- TRUCKERS AND RAILROADS ROLL -- US DOLLAR AND BONDS CONTINUE INVERSE RELATIONSHIP -- EURO SURGES OFF SUPPORT -- BONDS GET OVERSOLD BOUNCE -- DOW JONES INDUSTRY GROUPS

RUSSELL 2000 CHALLENGES DECEMBER HIGH... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor

The Russell 2000 is making a breakout bid that would bode well for the overall market. While the Dow and the S&P 500 moved higher in December and January, the Russell 2000 kept banging into resistance form its early December highs around 800. The inability to breakout showed relative weakness and large-caps were getting preferential treatment. The Russell 2000 is making a bid to exorcise resistance with a break above 800 today. In the process, the index recorded a 52-week high and small-caps are returning to the party. A convincing breakout would signal a continuation of the July-November advance and reinforce support around 770. The Russell 2000 represents high-beta small-cap stocks and a breakout reflects a bigger appetite for risk.

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TRANSPORTS TAKE THE LEAD IN JANUARY ... The Dow Transports has been one of the top performers in January and the Average is challenging resistance near its all time highs. The Average met resistance around 5000 in May and July 2006, swooned to 4150 in September and then a surged back above 4850 in November. It has been a wild ride over the last 12 months and a large inverse head-and-shoulders pattern is taking shape. The June and December lows mark the shoulders, the September low forms the head and the neckline extends from the May high. Actually, there is a resistance zone around 4900-5000 and a break above 5000 would confirm the head-and-shoulders pattern. Volume is an important part of the pattern and upside volume has been strong during January. The Dow has already done its part with a new high and a breakout in the Dow Transports would be Dow Theory bullish.

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TRUCKERS AND RAILS POWER THE TRANSPORTS ... The Dow Jones Railroad Index ($DJUSRR) started it off with a breakout in mid January and the Dow Jones Trucking Index ($DJUSTK) surged above its autumn highs today. The Trucking Index led the market lower from July to December, but then caught fire in January. CH Robinson (CHRW) powered the index with a massive gap and advance today. The combination of lower oil prices and firm economic growth is good for this economically sensitive group. The Railroad Index surged with the rest of the market in Sept-Oct, corrected in Nov-Dec and surged again in January. The surge above the December highs signals a continuation of the uptrend. Notice how the 50-day simple moving average held on last week's pullback and this index is in good shape as long as 400 holds.

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US DOLLAR INDEX DROPS AFTER FED DECISION... The Federal Open Market Committee (FOMC) made their policy announcement today and there were few surprises as the Fed left the Fed Funds rate unchanged. The Fed sited firm growth, moderate inflation and stabilization in the housing market. Bonds reacted with an oversold bounce and the US Dollar reacted with a sharp decline. Bonds and the US Dollar Index have been negatively correlated over the last two months as the prospects of higher interest rates pushed bonds lower and the US Dollar higher.

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The next charts show the iShares ~20-year T-Bond Fund (TLT) and the Euro Currency Trust (FXE), which have been positively correlated over the last two months. The correlation is positive because both moved in the same direction (down). TLT became oversold and found support around 86.5 from the October low. Today's bounce reinforces support, but it is not quite enough to reverse the two month downtrend. The Euro Currency Trust (FXE) found support from broken resistance around 129. This is a basic tenet of technical analysis: broken resistance turns into support. FXE broke 129 with a gap and huge move in November. The ETF returned to this resistance break in early January and stabilized over the last two weeks. Today's surge reinforces support and MACD moved back above its signal line.

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USING THE DOW JONES INDUSTRY GROUPS... There are over 100 Dow Jones Industry Groups available at Stockcharts.com. You can find a list by choosing symbol lookup and then searching for the term "DJ US". These industry groups are good for breaking down a sector and looking at the individual parts. For example, the Basic Materials Sector ($DJUSBM) can be broken down into Aluminum ($DJUSAL), Chemicals ($DJUSCH), Coal ($DJUSCL), Forest and Paper Products ($DJUSFR), Non-Ferrous Metals ($DJUSNF), Gold Mining ($DJUSPM) and Steel ($DJUSST). A quick scroll through these charts reveals the leaders and laggards within the sector. The Dow Jones Basic Materials Index is challenging its May high and shows good relative strength in January. Within this sector, the Chemical and Steel groups are leading the charge, while Coal and Gold Mining groups are lagging. The latter two started moving higher in January and have some catching up to do.

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