WALL STREET HIT HARD -- FED CUTS NOT HELPING -- FINANCE SECTOR BEARS THE BRUNT -- DOW TRANSPORTS SINK -- NASDAQ 100 EQUAL WEIGHT ETF UNDERPERFORMING -- NDX BULLISH PERCENT INDEX SHOWS WEAKNESS
BROAD SELLING HITS WALL STREET... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor
All of the major index ETFs moved sharply lower as broad selling pressure gripped Wall Street on Wednesday. The Russell 2000 ETF (IWM) led the way by losing over 3%. Small-caps lagged on the way up (mid August to mid October) and are now leading on the way down. Large-caps are not fairing much better as the S&P 500 ETF (SPY) broke below its October low and is now testing support from the 200-day moving average.
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WHAT FED CUT?... What a difference a week makes. The Fed cut the Discount Rate and the Fed Funds Rates by 25 basis points last Wednesday. As the chart below shows, the Dow Industrials ETF (DIA) surged immediately after the news, but fell sharply the very next day. Even though DIA found some support around 134, it never really recovered after this fall. Notice that DIA surged after the first two cuts, but the bulls could not hold their gains after the third rate cut. These rate cuts are supposed to help and the inability to move higher is quite negative. With the second sharp decline in five days, DIA broke its support zone today and the bears are not finished just yet.
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FINANCIAL STOCKS LEAD LOWER - AGAIN ... The song remains the same. The Finance SPDR (XLF) led the market lower by sinking to its lowest level since 2005. Even though the ETF and a number of key components seem oversold, they are just getting more oversold as selling pressure continues. This highlights a key tenet of technical analysis: stocks can become oversold and remain oversold. This is what happens in strong downtrends. On the chart below, the Commodity Channel Index (CCI) for XLF dipped into oversold territory five times during the June-August decline. The indicator even moved below --200 twice. CCI has yet to break below --200 this go round, but the indicator became oversold for the second time during the latest decline (October-November). While there may be a short relief rally, I would not expect a lasting bottom anytime soon.
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RISING OIL SINKS TRANSPORTS ... Continued strength in oil prices is taking its toll on the Dow Jones Transportation Average. The Average broke down in July-August with a sharp decline below its 200-day moving average. After firming in September, the Dow Transports even broke back above its 200-day moving average with a surge in early October. However, this surge failed a few days later as the Average declined back below the 200-day. 5000 remains the level to beat. The Dow Transports went on to break support today and remains relatively weak. This is quite negative for the market overall because transportation companies are at the heart of the economy -- moving people and goods. This is probably why Charles Dow looked for the Dow Transports to confirm the Dow Industrials. Demand for transport services increases as the economy expands and decreases as the economy slows. The less we buy, the less that needs to be shipped. Judging from the Retail SPDR (XRT) chart below, it looks like consumer spending is slowing. The Dow Transports could now be getting hit by a double whammy of slowing demand and rising oil prices.
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NDX BULLISH PERCENT INDEX SHOWS WEAKNESS... While Nasdaq 100 moved to a new 52-week high at the end of October, the Bullish Percent Index (BPI) failed to follow suit and actually moved lower. The Nasdaq 100 BPI ($BPNDX) peaked in mid October and moved below 65% in late October. 65% is my "line in the sand". The Bullish Percent Index (BPI) shows strength when above 65% and weakness when below. Even though the Nasdaq 100 remains near its October highs this week, the Bullish Percent Index (BPI) moved below 57.5%, which is the lowest level since mid August. BPI is not confirming strength in the underlying index. Last week I highlighted negative Net New Highs in the Nasdaq as the index traded near a 52-week high. These non-confirmations reflect a narrowing advance in the Nasdaq and Nasdaq 100. It is time to be careful when fewer stocks are participating.
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QQQQ VERSUS QQEW... We can also detect a narrowing advance by comparing the performance of the Nasdaq 100 ETF (QQQQ) with the Nasdaq 100 Equal Weight ETF (QQEW). I noted last week that Apple (AAPL), Google (GOOG) and Microsoft (MSFT) accounted for over 20% of QQQQ. These three stocks have been exceptionally strong the last few weeks and this explains relative strength in QQQQ. However, a different picture starts to emerge when we treat the QQQQ components equally. The next chart shows the performance of QQQQ and QQEW over the last four months. QQQQ is up over 10%, but QQEW is up less than 4%. The gains in the equal weight index are less than half the gains of the "normal" QQQQ. Notice that QQEW was keeping up with QQQQ until early October. The divergence started in mid October and this is further evidence that the majority of components are not fairing as well.
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BULLISH PERCENT INDICES EXPLAINED... The Bullish Percent Index (BPI) is a breadth indicator based on Point & Figure buy signals. BPI equals the number of stocks on PnF buy signals divided by the total number of stocks in the index. Using the Nasdaq 100 as an example, if 60 stocks are on PnF buy signals, then BPI would be 60%. As a breadth indicator, it is based on a specific index, such as the Nasdaq 100, NY Composite or Consumer Staples sector. Stockcharts.com computes the Bullish Percent Index (BPI) for a number of key indices and 10 S&P sectors. You can find the complete list at the bottom of the Market Summary page. This link is under "tools" on the left navigation bar. The snapshot below shows the Bullish Percent Indices (BPI) and their closing values from Tuesday.
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