RUSSELL 2000 SHOWS RELATIVE WEAKNESS -- FINANCE STILL LAGGING -- DOUBLE TOPS WORKING FOR XLF AND XLY -- WALMART AND KOHLS WEIGH ON RETAIL ETF -- SURGING OIL WEIGHS ON DOW TRANSPORTS -- COMPARING BIOTECH ETFS
SMALL-CAPS AND FINANCE STILL LAGGING... Recent strength in the Nasdaq Composite and the Technology sector has been quite impressive over the last three weeks. However, this strength continues to be overshadowed by relative weakness in the Russell 2000 and the Finance sector. The Russell 2000 represents small-caps, which are the most vulnerable to swings in the economy. The Finance sector represents the banks and brokers, which are at the heart of the sub-prime problems. The finance sector is also the single biggest sector in both the S&P 500 and the Russell 2000.
First, let's compare the performance of the Russell 2000 with the other major indices. The market bottomed on 16-August (16 days ago) and the performance chart below covers this period. The Russell 2000 shows the smallest advance of the major indices. Relative weakness in small-caps is a negative for the market overall and we should keep a close eye on this key group. Unsurprisingly, the Nasdaq 100 is the leader by far and the Nasdaq is not too far behind.
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XLF FAILS AT 50-DAY... The Finance SPDR (XLF) was one of the big winners in mid August when the ETF surged above 35. This surge turned out to be a two-day wonder rally and XLF never made it back above 35. XLF also failed at its 50-day moving average and never broke this important level. In contrast, the Nasdaq 100 moved above its 50-day last week and the S&P 500 surged above its 50-day on Tuesday. The inability to break above the 50-day shows relative weakness on the XLF price chart. In addition, last week's bounce did not even some close to the late August high and this shows relative weakness. The Finance SPDR (XLF) declined 1.21% today and this was the second biggest loss among the sector SPDRs.
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DOUBLE TOP REMAINS IN PLAY ... I first mentioned the possibility of a double top in the Finance SPDR (XLF) on 9-June. This double top was confirmed with the break below the March lows. Broken support around 34-35 turned into resistance and this level held during August. Despite some serious volatility, the August trading range amounts to one big consolidation. It even looks like a diamond on the Point & Figure chart. The right half of the diamond is nothing more than a symmetrical triangle and a break below last week's low would signal a continuation of the prior decline (38 to 31.5). Needless to say, such a breakdown would be bearish for XLF and likely drag the broader market lower as well.
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A DOUBLE TOP FOR XLY TOO... While on the subject of double tops, we also have one working in the Consumer Discretionary SPDR (XLY). This ETF also broke its March low in August and broken support around 37 turned into resistance. XLY managed to firm in August with a volatile range, but this range looks like a consolidation or rest after the sharp decline. XLY declined 1.58% today and led the sector SPDRs lower. Weakness in retail and transport stocks contributed to the decline in the Consumer Discretionary sector.
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XRT HITS A WALL... Point & Figure charts are great for identifying support and resistance levels. The Retail SPDR (XRT) broke down with the rest of the market in July-August and then firmed over the last few weeks. The ETF tried three times to break above 40.18 and failed each time. The last three columns of X's mark these failed rallies and XRT needs to break above 40.18 to revive the bulls. I would not bank on a breakout just yet though. Retail stocks remain quite weak overall with both Wal-mart (WMT) and Kohls (KSS) hitting a 52-week lows today. Retail spending drives 2/3 of GDP and new lows are not encouraging.
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RISING OIL TAKES TOLL ON TRANSPORTS... The U.S. Oil Fund ETF (USO) surged almost 1% today and continued its sharp advance. I noted the falling wedge breakout in USO last Wednesday and this oil ETF is up around 10% in the last two weeks. Energy related stocks have been top performers over the last two weeks, but continued strength in oil is weighing on the Dow Transports. The Average broke key support at 5000 in early August and continued below its 200-day moving average. Broken support at 5000 and the 200-day turned into resistance over the last few weeks and this key Average never made it back above the break. Transport stocks are sensitive to both energy prices and the economy. A rise in energy prices combined with an economic slow down would hurt the bottom line.
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BIOTECH ETFS... Not all biotech ETFs are created equal. I follow four biotech ETFs and all four have been quite strong over the last five days. These include the Biotech SPDR (XBI), the Biotech iShares (IBB), the Biotech HOLDRS (BBH) and the Biotech & Genome PowerShares (PBE). Of these four, only the Biotech SPDR (XBI) broke out to new highs and recorded a 52-week high last week. This makes XBI the clear leader among the biotech ETFs. In addition, XBI is also leading the overall market as all of the major indices remain below their summer highs.
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The Biotech HOLDRS (BBH) is the weakest of the four and this ETF has been weighed down by weakness in Amgen (AMGN) and Genentech (DNA) over the last several months. These are the two biggest components and they account for over 50% of BBH. AMGN and DNA both recorded new 52-week lows in August and this led to 52-week lows in the Biotech HOLDRS. These two biotech behemoths sprang to life over the last five days and BBH is suddenly showing leadership with a move above its August highs.
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The Biotech & Genome PS (PBE) and the Biotech iShares (IBB) are not as strong as the Biotech SPDR (XBI), but not as weak as the Biotech HOLDRS (BBH). In fact, PBE and IBB show similar patterns and both are on the verge of important breakouts. PBE surged in March-April and then corrected from May to August. The decline retraced around 62% of the prior advance and found support in August. There is resistance at 19 and a break above the August high would signal a continuation of the prior advance. IBB is in a similar boat and a break above the July-August highs would signal a continuation of the March-April surge.
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