S&P 100 REMAINS RANGE BOUND -- RUSSELL 2000 FAILS AT RESISTANCE -- BROKERS SHOW RELATIVE WEAKNESS -- MERRILL LEADS BROKERS LOWER -- COAL STOCKS VERSUS CRUDE OIL -- CRB INDEX BREAKS RESISTANCE
SMALL-CAPS AND LARGE-CAPS LAGGING... Today's Market Message was written by Arthur Hill. - Editor
While the Nasdaq ($COMPQ) and Nasdaq 100 ($NDX) moved to new highs in early July, the S&P 100 ($OEX) and Russell 2000 ($RUT) met resistance from their June highs and stalled over the last six weeks. The S&P 100 represents large-caps and the Russell 2000 represents small-caps. Taken together, these two form a pretty big contingent within the stock market. Neither is keeping up with the Nasdaq, which represents techs, and the market is not firing on all cylinders. Despite relative weakness in OEX and RUT, the indices have yet to actually break down and the resolution of the current consolidations holds the key. Upside breakouts would re-assert the uptrends and downside breaks would call for a deeper correction.
Chart 1
S&P 100 STUCK IN A RUT... The S&P 100 moved above 700 at the end of May and then consolidated the last six weeks. The surge from March to May was quite sharp and this created an overbought situation. The consolidation serves as a rest and alleviates the overbought conditions. A break above 710 would be bullish and signal a continuation higher. On the flip side, the index established support at 683-685 in June and a break below this level would argue for a pullback. Broken resistance and the July trendline converge to mark support around 660-670 and this is first target for a correction.
Chart 2
RUSSELL 2000 ALSO RANGE BOUND... The pattern from March to July on the Russell 2000 is similar to that seen on the S&P 100. RUT surged above 850 at the end of May and then consolidation over the last six weeks. A break above the June highs (857) would be bullish and signal a continuation higher. Conversely, a break below the June lows would be bearish and argue for at least a correction. The July trendline and November-March support zone converge around 770 and this is the target zone for a correction.
Chart 3
BROKERS HIT A WALL... The Broker Dealer iShares (IAI) led the market higher in the second half of 2006, but the ETF has shown relative weakness in 2007 and this is weighing on the S&P 500. The first chart shows IAI and the price relative, which is an indicator that compares the performance of IAI to the S&P 500. The price relative moved higher from July 2006 to early January 2007 and this is when IAI outperformed the S&P 500. The price relative declined from January to July and this is when IAI underperformed the S&P 500. The brokers are at the heart of the stock market and relative weakness throughout 2007 is not a good sign for the broader market.
Chart 4
On the price chart, the Broker Dealer iShares (IAI) met resistance from its January-February highs over the last few weeks and a large double top could be forming. This bearish reversal pattern is still in the early stages though and a break below the March low is required for confirmation. More pressing, the ETF is trading near its 40-week moving average and a break below this level would be most negative. The 40-week moving average is equivalent to the 200-day moving average (40 x 5 = 200).
Chart 5
MERRILL BREAKS KEY MOVING AVERAGE... Merrill Lynch (MER) is one of the biggest brokers and the stock broke below the 40-week moving average over the last few weeks. IAI is still above its 40-week moving average and this shows relative weakness versus the group. The second chart shows MER with the price relative and this indicator moved below its March low over the last few weeks. This shows relative weakness against the S&P 500 and Merrill is having a tough time right now.
Chart 6
Chart 7
OIL AND COAL... Even though coal and oil are different energy sources, there appears to be a positive correlation between the price of oil and the performance of coal stocks. This makes sense because the demand for substitutes increases as the price of oil rises. Coal is not a viable substitute for gasoline, but it can be a viable energy substitute for chemical and utility companies. The next chart shows the Dow Jones Coal Index ($DJUSCL) and West Texas Intermediate Crude ($WTIC). Both rose from January 2005 to May 2006. The Coal Index peaked in May 2006 and oil peaked two months later. Both declined from July 2006 to September 2006. The Coal Index bottomed in September 2006 and oil bottomed in January 2007 (four months later). The correlation is not exact, but these two clearly moved in unison for extended periods and both have been moving higher since January 2007.
Chart 8
CRB INDEX BREAKS RESISTANCE... John Murphy reported that the CRB Index was on the verge of a bullish breakout on Monday and index obliged with a surge above its December high on Tuesday. Coal is not part of the CRB Index, but Crude Oil, Heating Oil, Natural Gas and Unleaded Gasoline feature prominently. The index surged in the first quarter of 2007 and then consolidated during the second quarter. Consolidation support is around 307 and consolidation resistance is around 319. This consolidation represents a rest after the sharp advance and the breakout signals a continuation higher. This is bullish for commodities and ties in with weakness in the US Dollar Index.
Chart 9
