DIA GIVES UP EARLY GAINS -- QQQQ HITS A SNAG -- CONSUMER STAPLES LEADING CONSUMER DISCRETIONARY -- THE AD VOLUME RATIO AND TUESDAY'S SURGE
DIA GETS COLD FEET... Today's Market Message was written by Arthur Hill. John Murphy will be back next week. - Editor
The Dow Industrials ETF (DIA) started the day strong, but gave up early gains and closed down for the day. The ETF met resistance from broken support around 134. This is a key tenet of technical analysis: broken support turns into resistance. Even though Tuesday's surge was impressive, follow through is what really counts. On the chart below, DIA broke support at 134 with a sharp decline in November. This decline created an oversold condition. Tuesday's sharp advance alleviated this oversold condition and the ETF met resistance at broken support today. More importantly, the trend since mid October is clearly down. DIA formed a lower high in late October and a lower low in mid November. This is the basic definition of a downtrend. At the very least, DIA needs to follow through on Tuesday's advance with a close above broken support (134.2).
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QQQQ STILL BELOW 50-DAY... The Nasdaq 100 ETF (QQQQ) also has an important test ahead. QQQQ broke key support at 52 with a sharp decline in November. Broken support now turns into resistance at 52 and this resistance is confirmed by the 50-day moving average. QQQQ surged on Tuesday, but fell back on Wednesday (after a strong open I might add). Wednesday's weakness reinforces resistance at 52. Let's see some follow through above 52 to confirm Tuesday's big advance. Before moving on, I should also note that SPY has resistance from broken support around 149-150. In addition, the ETF is battling to stay above its 200-day moving average. You can also use QQQQ, DIA and SPY to confirm one another. A resistance break means less if the others do not follow suit.
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CONSUMER STAPLES STILL OUTPERFORMING CONSUMER DISCRETIONARY... The contrast between the Consumer Staples SPDR (XLP) and the Consumer Discretionary SPDR (XLY) could not be greater at this moment. This contrast is important because it reflects market preferences. The Consumer Staples sector is considered defensive and the companies in this sector are less prone to economic fluctuations. Think of Procter & Gamble (PG), Clorox (CLX) and Colgate Palmolive (CL). In contrast, companies in the Consumer Discretionary sector are more prone to economic fluctuations. Think of Macy's (M), Target (TGT) and Pulte Homes (PHM). Comparing these two ETFs can give us a pretty good idea of economic conditions.
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The next two charts show some specific contrasts between XLP and XLY. First, XLP broke resistance around 27.5-27.75 and this area turned into support. In contrast, XLY broke support around 38.5 and this area turned into resistance. Second, XLP is trading close to a 52-week high while XLY is trading close to a 52-week low. Third, XLP managed a gain today, but XLY closed lower because of weakness in the retail group. The market clearly prefers staples over non-staples right now.
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On the chart just above, XLY opened strong and closed weak today. I noted the first resistance levels for SPY, QQQQ and DIA above. XLY needs to follow through and break above today's high for the bulls to have any kind of chance. The overall trend is clearly down for this ETF though. A short-term advance would still be considered a counter trend rally within a larger downtrend.
AD VOLUME RATIO... Today, I would like to review the AD Volume Ratio for the NY Composite and the Nasdaq. There are big buying days and then there are really BIG buying days. A big advance can occur with uninspiring breadth, but a really impressive advance must be accompanied by inspiring breadth. On Tuesday, we saw a big surge in the major indices as well as a big surge in the AD Volume Ratios. This merits our attention. For those needing a primer, I have included some explanations at the end of this commentary.
The AD Volume Ratio represents large-caps because large-caps dominate trading volume. The biggest stocks are always in the most active list. In contrast, the Advance-Decline Ratio represents mid-caps and small-caps. Regardless of market cap or volume, an advance equals +1, a decline equals --1 and unchanged equals 0.
Here's an example. With a market capitalization of $477 billion, Exxon Mobil (XOM) is the largest stock in the S&P 500. It trades an average of 24.4 million shares per day. In contrast, Dillards (DDS), with a market capitalization of $1.55 billion, is one of the smallest stocks in the S&P 500. It trades an average of 2.2 million shares per day. XOM trades over 11 times more volume that DDS. An advance in XOM adds some 20+ million shares to advancing volume, but an advance in DDS adds a mere 2 million or so. XOM carries considerable more "volume" weight than DDS. Despite some serious volume weight, XOM and DDS equal out when its comes to the AD Ratio and AD Line. An advance in XOM (+1) counts just the same as an advance in DDS (+1). This is why the Advance-Decline indicators favor small- and mid-caps, while the Advance-Decline Volume indicators favor large-caps.
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