SEMIS DRAG NASDAQ LOWER -- SEMICONDUCTOR HOLDRS (SMH) GAPS DOWN -- INTEL AND MICRON LEAD CHIPS LOWER -- MONEY MOVES INTO BIG PHARMA -- IWM MOVES HIGHER WITHIN WEDGE -- GROWTH LEADING VALUE -- A LOOK AT SECTOR PERFORMANCE SINCE THE FED CUTS
CHIPS WEIGH ON THE NASDAQ... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor
The Nasdaq Composite came under pressure with notable weakness in semiconductor stocks on Wednesday. The index exceeded its July high earlier this week and is up around 15% from its August lows. This is a pretty amazing advance in just seven weeks and the index is clearly overbought. 10-period RSI moved above 70 earlier this week and 20-period CCI has been above 100 since mid September. Both indicators are overbought, but still strong overall. RSI is holding its August trendline and remains well above 50 while CCI has been above 100 since mid September and remains well above its centerline. The trouble with momentum starts when RSI crosses below 50 and CCI breaks below zero. While overbought indices can remain overbought in strong uptrends, the odds are quickly moving in favor of a correction or consolidation in the coming weeks.
Chart 1
SMH TESTS THE 50-DAY... Look no further than the semis and the Semiconductor HOLDRS (SMH) for reasons behind Nasdaq weakness. SMH gapped down and moved sharply lower. The ETF has been underperforming the Nasdaq over the last few weeks and today's gap is not a good sign. While the Nasdaq moved to new highs in September, SMH hit resistance at 39 and never made it close to its July high. With today's decline, the ETF is testing support from the August trendline and the 50-day moving average. A head-and-shoulders pattern has been evolving since May and a trendline break would target further weakness towards the support zone around 35-36. A break below this support zone would confirm the head-and-shoulders and be bearish for SMH.
Chart 2
INTEL AND MICRON LEAD SMH LOWER... Intel (INTC) is one of the biggest components in the Semiconductor HOLDRS (SMH) and the stock declined over 2% today. INTC remains in a long-term uptrend as the rising 50-day moving average remains above the rising 200-day moving average. Moreover, a cup-with-handle pattern was taking shape and the stock was on the verge of breaking rim resistance. Alas, the breakout failed and today's gap is negative. Intel needs to fill the gap and break above 26.5 to revive the bulls.
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Micron (MU) reported a quarterly loss today and Wall Street took the stock to task. MU gapped down and is testing support around 10.3-10.5 for the third time in three months. Strangely enough, the stock surged ahead of the report and met resistance at 12. Resistance in this area stems from the July trendline and 200-day moving average. Today's decline reinforces resistance here and affirms the current downtrend. In contrast to Intel, the long-term trend for MU is down. The falling 50-day moving average is below the falling 200-day and Micron is below both. Look for a break above 12 to forge a big reversal.
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STRENGTH IN BIG PHARMACEUTICALS ... The market has been all about rotation the last few months and today's action is no different. While semis took a hit, money moved into a few big pharma names. Bristol Myers Squibb (BMY) found support near the 200-day moving average and surged above the 50-day over the last three days. Upside volume was above average the last few days and the next resistance level is around 32. Eli Lilly (LLY) went on a wild ride in late July and August before settling into a trading range for September. The stock surged above its July-August highs today and is now showing good relative strength. Pfizer (PFE) is not as strong as the other two because it has yet to clear its 200-day moving average. However, the stock is showing signs of life with a surge in the second half of August and a consolidation in September. The stock advanced sharply over the last three days and broke above its early September high.
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THE WEDGE CONTINUES TO RISE FOR IWM ... The Russell 2000 ETF (IWM) broke above resistance at 80 with a big surge on 18-Sept, the day of the Fed double rate cut. The index pulled back and consolidated after the breakout, but the breakout is largely holding and should be considered bullish until proven otherwise. As long as this signal remains in force, the trend is up and the next resistance area is around the June-July highs. At this point in time, I would like to focus on what it would take to reverse the current bullish signal and uptrend. The advance over the last seven weeks traced out a rising wedge. While this wedge can be potentially bearish, the bulls clearly have the upper hand as long as the wedge rises. With the surge over the last three days, the ETF established support at 79. A move below this level would break the wedge trendline, forge a lower low and reverse the current uptrend.
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GROWTH OUTPERFORMING VALUE ... The Russell 2000 ETF (IWM) can be broken down into two parts: value and growth. There are even two ETFs that capture these parts: the Russell 2000 Value iShares (IWN) and the Russell 2000 Growth iShares (IWO). IWO dropped sharply in Jul-Aug and then consolidated with a triangle. This pattern was resolved with a break above 85 and anther consolidation formed around 86. This week's surge triggered another breakout and the ETF is challenging its July high. Growth is clearly pulling its weight within the Russell 2000. In contrast, the Russell 2000 Value iShares ETF remains below its August high and 200-day moving average. The Russell 2000 Growth iShares broke both and this tells us that value is lagging growth. Look for a break above the August-September highs to bring IWN and small-cap value stocks on board.
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SECTOR PERFORMANCE SINCE THE FED CUT ... The Fed did a double rate cut on 18-September by cutting both Discount Rate and the Fed Funds rate by 1/2 percent. The market took off after the rate cut and I wanted to see which sectors performed the best since this cut. Enter the market carpet for the Amex Sector SPDRs. This can be found by clicking "market carpet" under tools on the left navigation bar. From the drop down menu on the upper right, choose "market summary carpet". This provides a great overview of market action with color-coding for easy visual reference. Each section of this carpet can be expanded for more focus by clicking on heading. In this case, I clicked on "Amex Sector SPDRs". Use the blue arrow at the upper left of the carpet to return to the full market summary carpet.
The carpet below shows price performance over the last 12 trading days (from 18-Sept to 3-Oct). This covers price action from the close before the Fed cuts to today's price levels. The Materials SPDR (XLB) is far and away the leader with an advance in excess of 8%, Not bad for 12 days. The Technology SPDR (XLK), Finance SPDR (XLF) and Industrials SPDR (XLI) are next in line with advances around 6%. I am encouraged to see Technology and Finance among the leaders. Technology is the most speculative sector and relative strength here reflects a good appetite for risk. The Finance sector is the most interest rate sensitive and this sector was the hardest hit by the credit market woes. It is important that this sector rebounds to signal an end to these credit problems.
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FOCUS ON THE CONSUMER DISCRETIONARY SECTOR... All nine sectors SPDRs are up since the Fed cut rates on 18-Sept, but some are up less than others and these are the laggards. The Utilities SPDR (XLU), Consumer Staples SPDR (XLP) and Healthcare SPDR (XLV) are the traditionally defensive sectors and it makes sense that these three are lagging. The appetite for risk surged with the Fed cut and investors were more interested in offense over defense. My main concern is with relative weakness in the Consumer Discretionary SPDR (XLY) over the last 12 days. This is the most economically sensitive sector and a number of key retail stocks are components. The next chart focuses on the price performance of these sector components. While there are many green squares showing gains over the last 12 days, there are also quite a few red squares that reflect losses over the last 12 days. Stocks with red squares did not partake in the rally over the last 12 days and are showing relative weakness. Notice that Home Depot (HD), Lowes (LOW) and Starbucks (SBUX) are among this group.
Chart 12
