QQQQ EXTENDS ITS POST-SURGE CONSOLIDATION -- XLF AND XLK FORM PENNANTS -- BONDS ARE THE BIG WINNERS FOR 2008 -- OIL IS THE BIG LOSER -- GOLD DIVERGES FROM OTHER COMMODITIES
QQQQ REMAINS IN CONSOLIDATION MODE... Today's Market Message was written by Arthur Hill. - Editor
The Nasdaq 100 ETF (QQQQ) continues to consolidate after the late-November surge. Chart 1 shows the ETF surging above 28 in late November and then consolidating the last four weeks (December). Most of the late-November gains are holding, which is positive. However, follow-through is what separates dead-cat bounces from extended rallies, even bear market rallies. Follow-through with a break above consolidation resistance would signal a continuation higher. Chart 2 shows hourly bars for a more detailed look at the surge and consolidation. After two surges (yellow areas), QQQQ consolidated by trading flat the last 3-4 weeks. The ETF bounced off support on Monday and Tuesday with a sharp move higher. A break above 30.5 would end this consolidation and call for a continuation of the prior advance. Conversely, a break below support at 28.5 would be negative.
Chart 1
Chart 2
XLF AND XLK BOUNCE OFF SUPPORT... Charts 3 and 4 show the Financials SPDR (XLF) and Technology SPDR (XLK) bouncing off their mid-December lows on Tuesday. After surging in late November and early December, both consolidated the last few weeks with pennant formations taking shape. Pennants are short-term continuation patterns. With the prior move up, these pennants can be viewed as potentially bullish continuation patterns. Tuesday's bounce off support looks promising, but it was on low volume during holiday trading. Watch these pennant boundaries when Wall Street returns to full force in early January. Upside breakouts in these key sectors would be most promising for a bear market rally. The red boxes mark resistance zones (targets) just below the 200-day moving averages. With both ETFs trading well below their falling 200-day moving averages, the long-term trend is still considered down. This is why I consider the current advance to be a bear market rally within a larger downtrend.
Chart 3
Chart 4
INTER-MARKET ETF PERFORMANCE FOR 2008... PerfChart 5 shows five inter-market ETFs over the last 12 months. Stocks and oil finished sharply lower for the year. Bonds ended the year sharply higher. The dollar and gold finished slightly positive. Despite trading flat most of the year, the iShares 20+Yr T-Bond ETF (TLT) is by far the biggest winner with a gain in excess of 30%. Almost all of these gains occurred with a surge from mid November until mid December. The US Dollar Index Bullish ETF (UUP) was down the first half of 2008, but advanced in the second half to end the year with a small gain. The streetTRACKS Gold ETF (GLD) was up the first half of the year, but dipped into negative territory as the dollar advanced in the second half of 2008. A strong rally in the last six weeks pushed GLD (magenta) into positive territory by year end. The S&P 500 ETF (SPY) and United States Oil Fund ETF (USO) were the biggest losers. SPY (red) lost over 35% and USO (light blue) was down over 60%. SPY never had a chance as stocks started the year week and continued lower throughout 2008. As January went, so went the year. We'd best pay attention to January 2009. USO was by far the most volatile as the ETF swung from a 50% gain to a 60% loss in around 6 months. PerfChart 6 shows the gains/losses in histogram format.
Chart 5
Chart 6
DEFLATIONARY PRESSURES AND WEAK DEMAND... There are three themes working here. First, pervasive weakness in oil and unbridled strength in bonds point to deflationary pressures. Second, the sharp decline in oil reflects waning demand, which affirms economic weakness. A recession is negative for the stock market. Third, gold and the dollar maintained their inverse relationship with charts that are virtually mirror images. GLD was largely up when UUP was down and vice versa. Will these themes continue into 2009? As long as bonds remain strong and oil remains weak, I would expect deflationary fears to persist and this could be negative for stocks. Despite weakness in oil, gold held up relatively well in 2008 and its performance will likely continue its link to the dollar. I am impressed with the sharp rally in gold over the last six weeks and will be watching this price chart closely in 2009.
GOLD DIVERGES FROM OTHER COMMODITIES... PerfChart 7 shows six commodity based ETFs over the last 12 months. Five of the six are down sharply for the year. In a nutshell, commodities were routed in 2008. The streetTRACKS Gold ETF (GLD) is the only exception with a small gain for the year. Gold is clearly not just any old commodity. Old? Certainly. Ordinary? Certainly not. There is clearly something more to gold. At the very least, it is a hard asset in times of uncertainty. Even the Silver ETF (SLV), a distant cousin of gold, was not immune to general weakness in commodities as it finished over 25% lower this year. 2008 performance would suggest that silver is more industrial and gold is more precious.
The streetTRACKS Gold ETF (GLD) and the Silver ETF (SLV) were the first commodity ETFs to find support (October) and bounce (November). Looking at the rest of the group, this chart reflects waning demand for industrial commodities and agricultural products across the board. The United States Oil Fund ETF (USO) and Base Metals PowerShares ETF (DBB) continued to new lows in December and remain the weakest. The Natural Gas ETF (UNG) and Agriculture PowerShares ETF (DBA) also hit new lows in December, but both bounced off these lows over the last few weeks. Despite the December bounces, strong downtrends remain in these key commodity groups. Expect further weakness in stocks and the economy as long as these key commodity groups remain weak. An upturn in the economy would most likely be preceded by an upturn in these key commodity ETFs.
Chart 7
Chart 8
