MORE NEW LOWS THAN NEW HIGHS -- BONDS SURGE TO RESISTANCE -- XLP SHOWS RELATIVE STRENGTH -- XLY HITS RESISTANCE -- FALLING OIL HELPS RETAILERS
NEW LOWS OUTPACING NEW HIGHS... Today's Market Message was written by Arthur Hill. John Murphy will return tomorrow. - Editor
The 10-day simple moving average (SMA) for Net New Highs is a good medium-term indicator to assess broad market strength or weakness. Net New Highs equal new 52-week highs less new 52-week lows. A 10-day SMA is applied to smooth the data series. The logic is simple and straightforward. The market shows strength when new highs outpace new lows and shows weakness when new lows outpace new highs. Chart 1 shows the indicator with the NY Composite. The red dotted lines show crosses into negative territory and the green dotted lines show crosses into positive territory. The black arrows show crossovers that were reversed within a few days. No indicator is perfect. The 10-day SMA for Net New Highs turned negative in early June and has remained negative the last three months. This coincides with a downturn in the NY Composite over the same period. The indicator remains well above its July low, but still in negative territory. A break into positive territory would signal the start of an upswing.
Chart 1
Chart 2 shows the 10-day SMA of Net New Highs for the Nasdaq. Over the last 12 months, there have only been two crossovers, a positive cross in late September 2007 and a negative cross in late October 2007. The indicator has been negative since October 2007, almost 11 months. With a sharp decline the last few weeks, the Nasdaq is trading back near its March-July lows. However, the Net New Highs indicator remains well above its March-July lows. Perhaps there is less selling pressure on this latest downturn, but the fact remains: there are more new lows than new highs. This shows more weakness than strength. Look for a move into positive territory before expecting a sustainable advance in the Nasdaq.
Chart 2
DÉJÀ VU FOR BONDS... Bonds surged over the last two weeks as money moved from risky assets to relative safety. Chart 3 shows the iShares 20+ Year Bond ETF (TLT) with the S&P 500 ETF (SPY). TLT surged to its highest level since January-March 2008. These two months also marked flights to safety when investors gobbled up bonds. The credit crisis was just getting warmed up in January when the Fed introduced its Term Security Lending Facility for $30 billion. In addition, the Fed slashed the discount rate and the federal funds rates 1.25% in January. This drastic Fed action spurred a relief rally on Wall Street and bonds pulled back from their highs. This was short-lived as bonds surged again in March with the Bear Stearns collapse. The Fed came to the rescue again and this prompted another peak in bonds (green arrow). Stocks bottomed and moved sharply higher from mid March to mid May. Flash forward six months and we are witnessing the Fannie Mae/Freddie Mac bailouts as well as the Lehman (LEH) liquidity rumors. This prompted another flight to safety and a sharp decline in stocks. Will these latest maneuvers spark another rally for stocks? Watch bonds for clues. Bonds are benefiting as investors shun riskier assets (stocks) in favor of safe returns. A decline in bonds would show less fear and this could benefit stocks. Money from bond sales would have to be put to work elsewhere - possibly in stocks.
Chart 3
CONSUMER STAPLES REMAIN STRONG... There are not many sector SPDRs trading above their 200-day moving averages. In fact, the Consumer Staples SPDR (XLP) is the only sector SPDR currently above its 200-day moving average (as of this writing). The Consumer Discretionary SPDR (XLY) is close, but no cigar after Tuesday's bearish engulfing. This is another measure of relative strength that shows a preference for safety. Consumer staples represent everyday products that we need no matter what the economic conditions. Chart 4 shows daily candlesticks with a gap/breakout on Monday. Chart 5 shows the long-term picture with a massive triangle in 2008. The bottom window shows the price relative, which compares XLP to SPY. The price relative bottomed in October and surged to new highs over the last few weeks. XLP is clearly outperforming SPY. Charts 6, 7 and 8 show some leaders in the sector.
Chart 4
Chart 5
Chart 6
Chart 7
Chart 8
XLY STALLS AT RESISTANCE... With the Consumer Staples SPDR surging and showing relative strength over the last two months, one would expect the opposite from the Consumer Discretionary SPDR (XLY). However, the Consumer Discretionary SPDR has also shown relative strength the last two months. Chart 9 shows XLY surging from mid July to early August and meeting resistance around 31-32. Resistance in this area held the last 4-5 weeks. Trouble could be brewing as XLY formed a bearish engulfing pattern on Tuesday and firmed on Wednesday. There is support around 29.5 from the mid August and early September lows. A move below this level would reverse the current uptrend and call for a test of the July lows. Chart 10 shows a long-term view that affirms resistance. The July 2007 trend line and falling 200-day moving average converge around 31-32 to mark resistance. Relative strength remains the big caveat. The bottom window shows the price relative surging over the last two months.
Chart 9
Chart 10
OIL AND RETAIL STOCKS... Retail stocks make up a good portion of the consumer discretionary sector and XLY. While not the sole catalyst, the sharp decline in oil is one reason for the sharp rise in the Retail SPDR (XRT) over the last two months. More money spent on energy means less money available for other things, namely discretionary items. With a sharp decline in oil, consumers can spend more on restaurants, clothes, gourmet coffee, video games and such. Sounds logical enough. Chart 11 shows the Retail SPDR bottoming within a few days of West Texas Intermediate Crude ($WTIC). XRT is up over 20% since mid July, while $WTIC is down over 25%. This relationship bears watching as XRT trades near its May highs and XLY meets resistance around 31-32.
Chart 11
