STRONG JOB REPORT PUSHES MARKET TO NEW HIGHS -- BONDS SELL OFF AS YIELDS TURN UP -- FORMER LAGGARDS LEAD RALLY INCLUDING FINANCIALS AND SMALL CAPS -- WEEKLY INDICATOR TURNS POSITIVE
FINANCIALS AND SMALL CAPS TURN UP ... On Monday I wrote about the sharp upturn in financials and small caps, and remarked that their new strength had taken a big weight off the market. That strong trend in those two former laggards has had a lot to do with this week's strong finish. Financials were actually the market's strongest sector for the week. Consumer Discretionary stocks (including homebuilders and retailers) were the second strongest. That's certainly a reversal of recent trends in both groups. Small caps did much better than large caps percentagewise. That's also a reversal of recent trends. Financials and small caps also had a good chart week. Chart 1 shows the Financials SPDR (XLF) breaking out to a new three-month high on Friday. Chart 2 shows the Russell 2000 Small Cap Index also trading at a three-month high. Other former laggards that ended the week on a strong note were REITs, retailers, and transports (airlines and rails in particular).
Chart 1
Chart 2
GROUPS HITTING NEW HIGHS ... Although former laggards had the week's biggest percentage gains, former leaders continue to rise as well. One of the simplest ways to identify them is to look for sectors and industry groups that hit new highs first. We've been writing about many of them over the last month. The list contains (in aphabetical order) biotechs, consumer staples, energy (oil service in particular), gold mining, Internet, technology, and telecom. Add industrials to that list. Those remain the market's strongest groups. This week, we also wrote about new buying in big pharmas. Chart 3 shows the Pharm Holders (PPH) surging to a new three-month high. What most of the list has in common is that it includes large-cap multinationals with big exposure to foreign markets. That allows stocks to benefit from strong global growth and a weaker dollar. The technology sector, for example, may be feeding off a strong uptrend in Asian markets to which it traditionally has strong ties. That may explain why the Nasdaq 100, which contain the largest technology stocks in the Nasdaq market, was the first stock index to reach a new 2007 high and remains a market leader.
Chart 3
BOND YIELDS TURN UP ON PROFIT-TAKING ... While Friday's strong jobs report boosted the stock market, it caused profit-taking in bonds and pushed bond yields higher. Chart 4 shows the 10-Year T-note Yield closing over its 50-day moving average for the first time since mid-July. When bond yields rise, bond prices fall. Chart 5 shows the price on the 7-10 Year Treasury Bond Fund (IEF) falling below its 50-day average for the first time in three months. That's added confirmation that investors are moving money out of bonds and back into stocks.
Chart 4
Chart 5
GOLD AND ENERGY STOCKS ARE JUST CONSOLIDATING... Some of our readers asked if the uptrend in gold and energy shares is still intact. The answer is yes. A modest bounce in the dollar caused some minor profit-taking in gold and oil shares, but both groups ended the week on a firm note. Chart 6 shows the Energy SPDR (XLE) in a minor pullback, but still above its July peak. Chart 7 shows the Market Vectors Gold Miners ETF (GDX) doing the same. The GDX recently broke out to a new 2007 high. The recent pullback found new support at its July peak near 43. That's what should happen in an ongoing uptrend.
Chart 6
Chart 7
WEEKLY MACD LINES TURN POSITIVE ... Last Friday, I wrote that the weekly MACD lines hadn't turned positive yet for the S&P 500, but were close to doing so. They turned positive this week. I wrote last Friday that "we need to see a positive crossing by the weekly (MACD) lines (or a histogram move over zero) to confirm that the current rally has enough strength to move to new highs". Both events took place this week. Chart 8 plots the weekly MACD histogram bars on top of the S&P 500. Intermediate buy and sell signals are given when the histogram bars move above and below the zero line. Since this is weekly indicator, its signal are given much later than signals on daily charts (which turned positive during August). But it's an important confirmation that the current rally has some staying power. It's taken seven weeks from the histogram bottom in mid-August to a bullish crossing. That's not unusual. It took eight weeks for that to happen in the summer of 2006. What is unusual this time is that the bullish crossover took place as the market was hitting a new high. Most often, the weekly MACD lines turn up well before a new high. The reason for this late crossing is the unusually deep correction this summer. The histogram bars fell to the lowest level in four years. That's why it took it so long to turn positive. It's a late signal, but an encouraging one.
Chart 8
YOU DON'T HAVE TO WAIT FOR ME TO SHOW YOU ... I'm always surprised by the number of requests that I get to show a certain chart or a certain indicator. I often suggest keeping an eye on a certain chart for a possible upside breakout or turnaround. Or, I may alert you to the possibility that an indicator (like the weekly MACD) is close to turning positive. But there's no need to wait for me to show you what a price chart or indicator looks like each day. Every single chart and indicator that I show on this website is taken right from Stockcharts. You can look at it yourself. If you don't know how, you should learn. If a particular chart or indicator is important to you, you can easily monitor it yourself. There's no need to ask me to show it to you.
