USING PERFORMANCE CHARTS TO FIND GROUP LEADERS AND LAGGARDS -- WHY RECENT PREFERENCE FOR BLUE CHIPS ISN'T A GOOD SIGN -- WEAK JOBS REPORT PUSHES DOLLAR AND BOND YIELDS LOWER - BONDS AND GOLD ARE DAY'S WINNERS AS STOCKS DROP
JOHN'S LATEST PERFORMANCE CHART... Each week I post a performance chart under the headline shown above. It can be found on the John Murphy page. I usually show which market sectors, or industry group, are doing better than the S&P 500 (which is the industry benchmark for the "market) and those groups that are doing worse. I get those number right from the Performance Charts (PerfCharts on the Stockcharts main menu). By accessing that feature, you can compare the relative performances for the major stock indexes, large and small caps, intermarket comparisons, sector SPDRs, and industry groups. You can make those comparisons over any time period you like -- daily, weekly, monthly, year-to-date, or several years. The charts can be shown in line or bar format. Chart 1 uses the bar format.
Chart 1
JULY PERFORMANCE FIGURES CARRY A MESSAGE... Chart 1 shows "John's Latest Performance Chart" that reflects the market's stronger and weaker groups during the hightly volatile month of July. All are plotted around the S&P 500 which lost 3.2% during July. [The S&P can also be plotted as a zero line]. The bars to the left of the S&P did better than the general market. The two top gainers were gold and oil service stocks. The AMEX Gold Bugs Index ($HUI) gained 4.5% in the face of a severe market downturn. Oil Service stocks held up well on the back of rising oil prices (although the've started to slip during the first week of August). Semiconductors lost a small -.42%, but held up better than the S&P. The bars to the right show where most of the weakness has been. Brokers, banks, and retailers were among July's weakest groups. [Homebuilders and REITs were even weaker]. I did a story on Thursday about how relative weakness in retailers was tied to housing problems. The beauty of the performance bars is that they can tell us in one picture where investors might be looking to invest (like gold) and what to avoid (financials, retailers, and anything tied to housing). That juxtaposition of the performance bars also carries a negative warning for the stock market.
DOW LEADERSHIP ISN'T NECESSARILY A GOOD THING... Although the entire market fell last month, some market indexes fell more than others. The biggest loss was suffered by the Russell 2000 Small Cap Index (-7.2%). By comparison, the S&P 500 lost 3.2%. The smallest loss was suffered by the Dow Industrials, which fell only -.53%. Some investors may take comfort in the Dow's smaller losses. I'd like to suggest, however, that Dow resilience isn't necessarily a good thing for the market. But first let's look at the relative performance of four major market indexes during the major bull market. The green line on the top of Chart 2 is the Russell 2000 Small Cap Index. That was the market leader for four years; the S&P 500 (red line) came in second and the NYSE Index (blue line) came in third. The Dow Industrials (black line) was the weakest of the four. As useful as that chart is, there's another way to plot the same lines. Chart 3 makes the Dow the base line (horizontal line). That shows the other three lines "relative" to the Dow. Chart 3 shows the lines in the same order of ascendancy, but with one major difference. On a relative basis, the other three lines have been dropping much faster than the Dow since the start of 2006. The drop in the other three indexes relative to the Dow has become even more pronounced since the spring of this year. That's just another way of saying that the Dow has gone from the market's weakest stock index to its strongest. The two indexes that have fallen the hardest this year are small caps and the S&P 500. Let's focus on the latter.
Chart 2
Chart 3
INVESTORS PREFER THE DOW WHEN THEY'RE WORRIED ... I'm going to compare the "relative" performance of the Dow Industrials to the S&P 500. To do that, I'm using a relative strength ratio. And it tells quite a story. Chart 7 plots the Dow versus the S&P 500 for five years. When the ratio is dropping (like mid-2002 to early 2006) the Dow is lagging behind the S&P. When the line is rising (early 2006 to now), the Dow is doing better. Chart 7 shows that the Dow/S&P ratio bottomed in early 2006, and has just recently broken upwards to a three-year high. I'm suggesting here that the new preference for the blue chips in the Dow is a sign that investors are getting more nervous about the stock market and are shifting to the "safest" stocks. Charts 7 and 8 seem to support that view. The ratio in Chart 7 peaked in mid-2002 just as the bear market was ending. As the market rose for the next four years, investors didn't need the "safety" of the Dow; they went for more growth in small caps and riskier stocks. Chart 8 shows a more compelling story. In the last two bull market years of the 1990s, the Dow was underperforming as investors bought into the new technology paradigm. The bottom in the ratio in 2000 coincided with the start of the worst bear market in generations as the Nasdaq fell 80% and the S&P 500 lost half its value. Here's the point. The Dow/S&P ratio bottomed in 2000 as the market was peaking. The ratio peaked in 2002 as the market was bottoming. The ratio is now rising. In the past, a rising Dow/S&P 500 ratio has coincided with a weaker market. That's why recent preference for blue chips isn't a good sign.
Chart 4
Chart 5
EURO AND YEN RISE AS DOLLAR DROPS -- GOLD BOUNCES ... Gold was one of the few winners today. Part of the reason was a drop in the dollar and a jump in foreign currencies. The dollar dropped because Treasury yields fell further. Bond yields fell (and prices rose) in an ongoing flight to safety from a falling stock market. The catalyst for those predictable intermarket reactions was the jobs report, which showed fewer jobs created than expected last month (in fact, the slowest since February) and an uptick in the unemployment rate to 4.6%. Economists blamed that on the weak housing sector (the same economists who keep telling us that the economic fundamentals are still bullish). Chart 6 shows the streetTracks Gold ETF (GLD) climbing the equivalent of $8.00 today on rising volume. Chart 7 shows the Euro climbing .73% and nearing a record high. The Japanese yen (Chart 8) is rallying as well. That has two side effects. It weakens the dollar and threatens to unwind the "carry trade" that has supported the global bull market.
Chart 6
Chart 7
Chart 8
BOND YIELDS BELOW 200-DAY AVERAGE... Bonds were also big winners today as price rose and yields fell. That's been the case since the start of July when the stock market started to weaken and investors fled stocks to the safety of Treasury Bonds. Chart 9 shows the 7-10 Year Treasury Bond Fund (IEF) challenging its yearly high. When bond prices rise, yields fall. And they are. Chart 10 shows the 10-Year Treasury Note Yield falling below its 200-day average for the first time in three months. Since bond yields and stocks have been positively corrected of late (both are falling together), that's not a good sign for stocks. Several stock indexes broke their 200-day lines as well.
Chart 9
Chart 10
SMALL CAPS ARE ON CRITICAL LIST... It was the failure of the Russell 2000 Small Cap Index to hit a new 2007 high in mid-July and the subsequent break of its 200-day moving average that sent off some of the earliest warnings of a more serious market downturn. Unfortunately, small caps have just sent another bearish warning. Chart 12 shows the RUT trading just below its early March trough at 760. Today's close at 755 breaks that support level and puts the small cap index at the lowest level in nine months. That's a another weak sign for the entire market. Although large caps (especially the Dow) have held up a bit better than small caps, it's just a matter of time before they follow small caps lower.
Chart 11
S&P BREAKS 200-DAY LINE... The market's technical picture continues to worsen. Today was an especially bad day for a number of reasons. For one, the S&P 500 closed below its 200-day average for the first time in a year (Chart 12). That raises the possibility of a decline to its March low, which would make this the first 10% loss since the bull market began. Market internals were also bad. Not only was volume heavier than yesterday's modest up-day, big board losers were roughly five to one negative (same as the Nasdaq). Downside volume on the big board swamped upside volume by an eleven to one ratio (six to one on the Nasdaq). All market sectors fell. The biggest sector losers were financials (-3%), energy (-2.6%) and materials (-2.5%). The smallest losses were in consumer staples (-.26%) and healthcare (-.33%). Transports and utilities lost -3.78% and -3.6% respectively. Both closed below their 200-day averages. Small caps were the day's biggest losers. The Russell 2000 Small Cap Index fell -3.70% and closed at a new 2007 low. The Dow suffered the smallest loss (-2.1%). The only winners were Treasury bonds and gold. Last but not least, the CBOE Volatility (VIX) had it highest weekly close in four years. None of those factors are good for the market. Neither is the fact that we've entered the dangerous August to October time frame. I've been warning for the last couple of weeks that things could get a lot worse before getting better. I don't see anything to change that negative view.
Chart 12
