BULLS REACT TO FED CUT -- SMALL-CAPS AND MID-CAPS LEAD - QQQQ BREAKS RESISTANCE -- APPLE, GOOGLE AND MICROSOFT POWER QQQQ -- QUALCOM BREAKS FLAG RESISTANCE -- BMC GAPS HIGHER -- INTEL HOLDS SUPPORT -- NET NEW HIGHS NOT STRONG
STOCKS SURGE AFTER FED ANNOUNCEMENT... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor
As is usually the case on Fed day, the stock market put in a volatile performance on Wednesday. The major indices were modestly higher heading into the Fed's policy statement, and then swooned around statement time. The Fed made its policy statement at 2:15PM, and cut the Fed funds rate 25 basis points. This was widely expected, and the market rallied sharply after the news. All of the major indices finished in the green with small-caps, mid-caps and techs leading the way. On the first chart below, the S&P 400 Midcap ETF (MDY) bounced off support from the 50-day moving average, 200-day moving average, and broken resistance zone. The ETF remains well below its July high, and still shows relative weakness, but this bounce looks good as long as support at 157.5 holds. On the second chart below, the Russell 2000 ETF (IWM) also bounced off support from the 50-day moving average, 200-day moving average, and broken resistance. There was quite a battle around 80, but this level ultimately held. IWM also remains below its summer highs and shows relative strength, but the bulls get the benefit of the doubt for now.
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QQQQ CONTINUES SHOW OF STRENGTH... The big story remains relative strength in the technology sector and the Nasdaq 100 ETF (QQQQ). QQQQ broke above consolidation resistance over the last few days, and this signals a continuation of the prior advance. The ETF surged above 52 in early October, and then formed a flat consolidation (flag). This consolidation alleviated overbought conditions, and signals a rest in the ongoing uptrend. The breakout over the last few days signals a continuation of the existing uptrend. Broken resistance at 54 turns into support, and this is the first level to watch for signs of trouble. The October lows mark key support at 52.
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QQQQ LEADERS... The Nasdaq 100 ETF (QQQQ) is up over 25% percent year-to-date, and is the clear leader among the major index ETFs. According to PowerShares, the top three stocks make up over 20% of this ETF. Apple (AAPL) accounts for 12.2%, Microsoft (MSFT) weighs in at 6.2%, and Google (GOOG) is 5.3%. I went through this exercise in July, and Apple accounted for 8.83% of the ETF then. Its weighting has gone up as its market capitalization has expanded, and Apple carries some amazing influence in QQQQ.
Looking at the charts below, it is little wonder QQQQ is trading at a 52-week high and leading the market. Apple is up over 100% for the year and is the big winner. Google is up over 50% on the year, and much of the advance occurred in the last 2 and a half months. In fact, the advance from mid-August looks downright parabolic, and I wonder how long this can be sustained. Microsoft (MSFT) is up over 20% this year, and most of the gains also occurred in the last 2 and a half months. This stock was underperforming in mid-September. The late September breakout suddenly unleashed the bulls. All three of these stocks are in clear uptrends, but they are also overbought and frothy. QQQQ is in good shape as long as this troika remains strong, and traders should watch these three for clues on QQQQ. On a fundamental aside, Apple and Google are fierce competitors with Microsoft. Despite this rivalry, all three are surging to new highs, and there appears to be plenty of pie for everyone -- at least for now.
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QUALCOM BREAKS FLAG RESISTANCE... Qualcom (QCOM) is the fourth largest component (4.5%) of QQQQ, but the stock has lagged the top components over the last few months. The stock surged from mid-August to late September, and then formed a falling flag in October. The flag found support near broken resistance and the 50-day moving average (~40). The flag breakout ends the October correction, and calls for a continuation of the Aug-Sep advance.
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BMC SOFTWARE GAPS HIGHER... BMC Software (BMC) is also part of the tech sector, and the stock shows good relative strength with a breakout over the last three days. The stock surged back above its 50-day and 200-day moving averages in September. After a consolidation, the stock gapped up and broke resistance with good volume over the last three days. The 50-day SMA moved above the 200-day SMA for a golden cross, and this stock is now part of the leader board.
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INTEL REMAINS STRONG... Even though the Semiconductor HOLDRS (SMH) and Semiconductor PowerShares (PSI) remain in the dumps, Intel (INTC) continues to show good relative strength and remains strong. I pointed out the cup-with-handle formation a couple of times, and featured Intel when it broke resistance with a surge above 26.5. The stock did fill this gap with a pullback, but held key support at 25 and moved back above 26.5 today. Intel will remain in bull mode as long as it holds 25.
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NET NEW HIGHS NOT SO STRONG... Even though the Nasdaq and the NY Composite remain strong, Net New Highs are not keeping pace, and this could become a problem. Net New Highs equals new 52-week highs less new 52-week lows. I apply a 10-day moving average to smooth the data series, and I look for crosses above or below the zero line for a trend bias. The bias is bearish when the 10-day SMA for Net New Highs is in negative territory, and the bias is bullish when the indicator is in positive territory. On the charts below, the indicator is shown in area format, and the underlying index is shown as a red line. SharpCharts subscribers can click on the chart to check the settings and save it to your Favorites.
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The 10-day SMA for Net New Highs on the Nasdaq moved into negative territory last week. This is quite surprising because the Nasdaq closed above its early October (closing) high this week. The Nasdaq remains strong, and hit a 52-week high this month, but new lows are expanding within the index, and this undermines the current advance. At the very least, it shows that something is not quite right. There should be more new highs than new lows when the Nasdaq is trading at a 52-week high.
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