BANKS AND MATERIALS LEAD STOCKS LOWER -- BANK OF AMERICA IS ONE OF THE BIGGEST LOSERS -- OVERSOLD DOLLAR BOUNCES FROM 2008 LOWS -- THAT'S CAUSING NERVOUS PROFIT-TAKING IN STOCKS AND COMMODITIES
BANK INDEX DROPS 3% ... A big drop in bank shares is pulling the financial sector lower today and the rest of the market with it. Chart 1 shows the PHLX Bank Index dropping well below its 50-day moving average. If those losses hold through the balance of the day, this will be the most significant drop below that support line since the July rally started. The relative strength line (top of Chart 1) is also starting to fall. That means that the market is losing bank leadership. Chart 2 shows the entire seven-month rally since March. The solid line is the BKX:SPX ratio. The rising ratio since March showed bank leadership on the way up. Since early September, however, the RS line has been diverging from the price bars. It has now turned down. That's not a good sign for the BKX or the S&P 500. The declining RSI (top of chart) and MACD lines (below chart) also show technical deterioration over the last month. It may also be worth noting that the BKX is slipping below a rising trendline drawn under its March/July lows. Bank of America is one of the main reasons why.
Chart 1
Chart 2
BANK OF AMERICA LOSES 4% WHILE FITB AND STI LOSE EVEN MORE... Bank of America is one of the biggest banks in the BKX and has more influence over its direction. It not a good sign therefore to see BAC falling more than 4% today and slipping to the lowest level in nearly three months. Its volume pattern (red circle) shows fairly heavy selling over the past week (including today). Its relative strength line (top of chart) is falling as well. Two smaller banks are also coming under a lot of pressure. Chart 4 shows Fifth Third Bancorp falling more than 7%, while Chart 5 shows Suntrust Banks losing more than 5%. Both show falling relative strength lines. All three are trading below their 50-day moving averages.
Chart 3
Chart 4
Chart 5
OVERSOLD DOLLAR BOUNCES ... The falling dollar has been supporting the rally in stocks since March. Chart 6 shows that the trend of the Power Shares Dollar ETF (UUP) is still down. It also shows, however, a short-term oversold condition as measured by the 14-day RSI line. The RSI has formed a short-term positive divergence with the UUP and is nearing a test of its midpoint 50 value. A move over 50 would increase the likelihood of a dollar rebound. A bouncing dollar would most likely cause more profit-taking in stocks and commodities. There's another reason to temper one's bearishness in the dollar. The weekly bars in Chart 7 show that the UUP has declined pretty close to its lows formed during March 2008 near 22. That puts it very close to a potential support zone. In addition, the 14-week RSI (solid line) has reached oversold territory below 30 for the first time in two years. It seems like everyone is talking the dollar down these days. The charts, however, suggest that the dollar may hold some upside surprises. That's not enough to signal any major trend changes. It may be enough, however, to temper one's short-term outlook on stocks and commodities. That may also explain why material stocks tied to commodities are among today's biggest losers.
Chart 6
Chart 7
MATERIAL SPDR MAY BE FORMING DOUBLE TOP... We wrote last week about potential short-term "double tops" developing in small caps, transports, and semiconductors. Here's another one. Chart 8 shows the Materials Sector SPDR (XLB) threatening its 50-day average after failing to overcome its September high. That underperformance is seen more clearly in its falling relative strength line (top of chart). No serious chart damage has been done, but it is a hint of a market pullback. The XLB would have to drop below its recent low at 29.17 to signal a more serious correction. All I'm writing about are signs of "short-term" deterioration and a warning to be more careful committing new funds at this point in time. It might even be a good idea to take some defensive action to protect existing profits.
Chart 8
UNDERLYING SUPPORT LEVELS TO WATCH ... I've recently shown that the Dow, the S&P 500, and the Nasdaq Composite Indexes are up against formidable resistance barriers above 10000, 1100, and 2200 respectively. That's another reason to turn a bit more cautious. The last three charts show those three indexes starting to slip over the last week. If the current pullback continues (as I suspect it will), the first test of support will take place at those 50-day lines. It's also possible that the market may be just entering a consolidation phase. In that case, it's also important that prices stay above their early October lows to prevent a short-term trading range from turning into a downtrend.
Chart 9
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Chart 11
GOLD STOCKS RETREAT... Gold mining stocks are seeing some heavy profit-taking today. Chart 12 shows the Market Vectors Gold Miners ETF (GDX) pulling back to its 50-day moving average. Newmont Mining is one of the day's weakest stocks. Chart 13 shows NEM falling toward its early October intra-day low at 41.95. Let's hope that it holds. Bullion is dropping $15. Chart 14 shows GLD slipping below initial support just above 102. There's much more support starting at 100. Despite today's drop, gold's uptrend is still intact.
Chart 12
Chart 13
Chart 14
BOND YIELDS JUMP... When stocks drop, Treasury bond prices usually rise and bond yields fall. Not today. Chart 15 shows the 10-Year Treasury Note Yield climbing to the highest level in two months. The jump in bond yields may be rattling stocks holders as well. The main reason being given for the rise in yields is the intention of the Treasury to extend the duration of bonds sold to finance the deficit. More bond supply would cause bond prices to fall and yields to rise. Rising bond yields are not helpful to the stock market or the economy.
Chart 15
