FINANCE SECTOR REMAINS A DRAG - BIG BANKS UNDER PRESSURE (JPM, GS, WFC, C, BAC) - EURO HITS A NEW HIGH FOR THE YEAR - GOLD ACCELERATES HIGHER - TIPS MOVING STEP-FOR-STEP WITH GOLD
FINANCE SECTOR REMAINS A DRAG... Link for todays video.While the S&P 500 moved higher the last two weeks, the Financials SPDR (XLF) has remained range bound and continues to underperform the broFinance sector remains a dragader market. Chart 1 shows XLF bouncing off support in early November, but stalling around 14.5-15 the last twelve days. The area around 15 is actually a logical place for a resistance or a reversal because it represents a 62% retracement of the October decline. Relative weakness in XLF can be seen with the price relative and a simple comparison to the S&P 500, which is shown in red. Notice how the S&P 500 moved to a new reaction high in November, but XLF remained below its October high. XLF is clearly not keeping pace with the broader market.
Chart 1
This relative weakness is confirmed with the relative strength comparative, a ratio of XLF and SPX (XLF:SPX). This ratio rises when the numerator (XLF) rises more than to the denominator (SPX). Conversely, it falls when the numerator (XLF) falls more than the denominator (SPX). The XLF:SPX ratio peaked in mid October and broke below its September lows this month. A bullish reversal would require XLF to break above 15 and the relative strength comparative to turn up.
In addition to relative weakness, chart 2 shows a bearish descending triangle taking shape on the 60-minute chart. This is a short-term pattern that could still go either way so I will be watching the boundaries closely. First, notice that XLF broke resistance around 14.5 and this area turned into support over the last two weeks. With XLF bouncing twice here (green arrows), the breakout and support are holding so far. Second, notice that XLF formed lower highs after each bounce (red arrows). These show selling pressure coming in at successively lower levels. The descending triangle is confirmed with a break below support (call it 14.5). Should XLF hold support, look for a break above 15 to revive the bulls.
Chart 2
BIG BANKS UNDER PRESSURE... Big banks dominate the Financials SPDR. JP Morgan Chase (11.94%), Bank of America (9.96%), Wells Fargo (9.31%), Goldman Sachs (6.26%) and Citigroup (3.93%) are the five biggest components. Together, these five stocks account for around 40% of the ETF. These big banks also feature prominently in FAZ and FAS, two leveraged ETFs. On the charts below, all five stocks show relative weakness since mid October. Each indicator window shows the stock price (blue) and the S&P 500 (red). The S&P 500 hit a new reaction high in November, but the stock prices are all well below their October highs and clearly not keeping pace. Chart 3 shows JP Morgan (JPM) breaking wedge support two weeks ago and moving towards support around 41. The stock shows relative weakness and remains in a downtrend as long as resistance at 44 holds.
Chart 3
Chart 4 shows Bank of America (BAC) locked in a trading range the last two weeks. After breaking support with a big decline in October, BAC rebounded back to around 16.5 with a 50% retracement. I am watching the two week consolidation for the next directional clue. A break above 16.5 would be bullish, while a break below 15.5 would be bearish.
Chart 4
Wells Fargo (WFC) broke channel resistance with a surge in early November, but then stalled over the last two weeks. Despite this breakout, WFC shows relative weakness since mid October and needs to break above 29 to reassert the uptrend.
Chart 5
Goldman Sachs (GS) went from one of the strongest in mid October to one of the weakest in late November. GS broke wedge support two weeks ago and is now testing its early November lows. There is possible support around 165-170, but no sign of a reversal yet. Look for a move above 175 to reverse the two week slide.
Chart 6
Citigroup (C) peaked ahead of the other big banks with a reaction high in late August. A falling price channel took shape as the stock fell below 4 in early November. Within this channel, Citigroup established resistance around 4.30 and a break above this level would be positive. Until such a breakout, the downtrend rules with the next target around 3.75.
Chart 7
EURO HITS A NEW HIGH... The Euro bulls have plenty to be thankful for as the Euro ETF (FXE) broke out of its two week trading range and recorded a new high for the year. Russia announced that it would add Canadian Dollars to its reserves to decrease dependency on the greenback. In addition, a sustained low interest rate policy at the Fed makes Dollars less attractive. With short-term rates near zero percent, the Dollar has also become popular for the carry trade, which involves selling Dollars to invest in other assets (stocks, commodities, bonds...). Chart 8 shows the US Dollar Index ($USD) falling along with the 1-Year Treasury Yield ($UST1Y) over the last nine months. The stock market advanced while these two fell. Chart 9 shows FXE breaking above its November highs and moving above 151 for the first time in 2009. No signs of weakness here. The bottom indicator window shows RSI bouncing off the 45-50 support zone again in mid November. Momentum favors the bulls as long as RSI holds this support zone.
Chart 8
Chart 9
GOLD ACCELERATES HIGHER... With the Dollar falling again today, chart 10 shows the Gold ETF (GLD) surging above 115 with its ninth up day in a row. Thus far in November, GLD is up 16 of the last 18 days with its monthly gain approaching 14%. This is more than double the gains seen in September (~6%) and October (~4%). While there is no disputing the uptrend, it is getting out of hand as it takes on parabolic qualities. Such sharp moves are also a challenge for analysis. The first support level is around 105, which is marked by broken resistance and the August trendline. The Aroon oscillator, which measures trend strength, has been positive since late July and largely above 50 since early September.
Chart 10
As far as an upside target is concerned, chart 11 shows the inverse head-and-shoulders breakout. The height of the pattern (~30) is added to the breakout (~100) for an upside target around 130.
Chart 11
GOLD RISES ALONG WITH TIPS... Not many assets are keeping up with gold these days, but the Inflation-Protected Bond ETF (TIP) is giving it a good run. Bonds are not near as volatile as gold so we cannot expect such big moves. Chart 12 shows the Gold ETF with the 5-day Rate-of-Change (left scale) and chart 13 shows the Inflation-Protected Bond ETF with the same indicator. Over the last nine months, the 5-day Rate-of-Change ranges from +1.50% to -1.75% for TIP (a 3.25% range). The 5-day Rate-of-Change ranges from +6% to -5% for GLD, which means GLD is more volatile than TIP. Therefore, we should expect bigger moves, both up and down, for GLD.
Chart 12
Chart 13
Both GLD and TIP have been moving higher since August. TIP is up over 6% and GLD is up over 25%. Despite some serious outperformance from GLD, you can see from the chart that the advances are pretty much step-for-step. In addition, the advances are both getting parabolic in nature and quite frothy. Such strength in the Inflation-Protected Bond points to inflationary pressures down the road. The same can be said for strength in gold.
Chart 14
