QQQQ BREAKS RESISTANCE -- BONDS PUSH INTEREST RATES HIGHER -- HEALTHCARE SPDR SURGES HIGHER -- CONSUMER STAPLES SPDR BREAKS 200-DAY -- FINANCIAL AND CONSUMER DISCRETIONARY SPDRS HIT RETRACEMENTS

QQQQ MAKES A BREAKOUT BID... Today's Market Message was written by Arthur Hill. John Murphy will return tomorrow. - Editor

Last week I wrote about relative weakness in the Nasdaq 100 ETF (QQQQ) and its inability to break resistance. Chart 1 shows a change afoot. After a sharp decline Friday-Monday, the ETF rebounded sharply over the last two days and closed above 46 for the first time since June 25th. Resistance around 46 held throughout July and into early August. Today's breakout is positive for large-cap techs. Broken support and the 62% retracement level mark the next resistance area around 47.5-48. The bottom indicator window shows StochRSI, which measures short-term momentum. Surges above .80 are considered short-term bullish and surges below .20 are considered short-term bearish. As witnessed with the whipsaw dip below .20 on Monday, this indicator can be quite volatile. Even so, short-term momentum is back with the bulls with another move above .80.

Chart 1

BONDS BREAK LOWER... Even though the Federal Open Market Committee (FOMC) decided to hold rates steady, the bond market acted on its own by pushing rates lower the last three days. In fact, bonds have been falling and rates have been rising since mid March. Chart 2 shows the iShares 20+ Year Bond ETF (TLT) with a lower low in June and a lower high in July. TLT bounced at the end of July, but met resistance from the mid July gap around 92 and moved lower the last three days. With the overall trend down, this week's decline looks like the start of another move lower for bonds. TLT needs to clear resistance at 92 to call for a reassessment. Chart 2 shows the 10-Year Treasury Note Yield ($TNX) over the last six months. Remember, rates move lower as bonds move higher. After breaking resistance in late May, TNX pulled back to establish support around 38 (3.8%). Rates surged in mid July as bonds fell and the 10-Year Note Yield formed a falling flag over the last three weeks. With a move higher the last three days, TNX is challenging flag resistance. A break above 41 (4.1%) would signal a continuation of the mid July surge and keep the bigger uptrend alive for interest rates.

Chart 2

Chart 3

THE REAL SECTOR LEADERS... The financial and consumer discretionary sectors led the market higher from mid July, but the healthcare and consumer staples sectors led the market higher since mid June. Will the real sector leaders please step forward? There is more than one way to measure relative strength and compare performance. Chart 4 shows the Sector SPDR PerfChart extending back to 19 June. Comparing the percentage change is one method to identify the leaders and laggards. Based on percentage change, XLV and XLP are the top performers for this time period.

Chart 4

XLV BOTTOMS FIRST... Now let's look at some other metrics to identify the leaders. I picked 19 June as the starting date on the PerfChart because the Healthcare SPDR (XLV) bottomed on 20 June. Chart 5 shows that XLV was the first sector to bottom and start moving higher (green dotted line). The Consumer Staples SPDR (XLP) bottomed a week later on 26 Jun. The Financials SPDR (XLF) and the Consumer Discretionary SPDR (XLY) did not bottom until 15 July. While the financial and consumer discretionary sectors outperformed from 15 July, they were late to the performance party and I would not call them the true market leaders. Money was already moving into healthcare (XLV) and consumer staples (XLP) before these two bottomed.

Chart 5

XLV AND XLP BREAK 200-DAY MOVING AVERAGES... The Healthcare SPDR (XLV) and Consumer Staples SPDR (XLP) also show relative strength based on their price charts. Healthcare and consumer staples represent the defensive sectors. No matter what happens to the economy, we still need our toothpaste, soap, bread and beer - not necessarily in that order. Chart 6 shows the Healthcare SPDR (XLV) finding support around 30 in March and again June. These two lows form a double bottom and XLV broke resistance with a surge this week. Regardless of the pattern, XLV is the only sector SPDR currently trading above its May-June highs. This tells us that the healthcare sector is clearly one of the leaders. Chart 7 shows the Consumer Staples SPDR (XLP) surging above its 200-day moving average and challenging its May-June highs. The Healthcare SPDR also moved above its 200-day moving average the last two days. These two sectors are the only two sector SPDRs currently above their 200-day moving averages. Both are clearly showing upside leadership based on this criterion.

Chart 6

Chart 7

XLF AND XLY NEARING KEY RETRACEMENTS... While the Healthcare SPDR and Consumer Staples SPDR are trading above their 200-day moving averages, Charts 8 and 9 show the Financials SPDR (XLF) and the Consumer Discretionary SPDR (XLY) trading well below their 200-day moving averages. XLF and XLY are also well below their May highs. As noted above, there is more than one way to gauge relative strength or weakness. The financial and consumer discretionary sectors are clearly not keeping up with the healthcare and consumer staples sectors on the price charts. Financials and consumer discretionary were impressive in mid July, but the bigger picture belongs to healthcare and consumer staples. In addition, the Financials SPDR (XLF) and Consumer Discretionary SPDR (XLY) are both meeting some resistance from their key retracements. The Fibonacci Retracements Tool shows resistance between the 50% and 62% retracements. This is a normal retracement for a bear market rally and further upside could be limited for both.

Chart 8

Chart 9