FINANCE SECTOR TESTS SUPPORT - REGIONAL BANK SPDR HITS RESISTANCE - BROKER - DEALER ISHARES CONSOLIDATES - DOWNGRADES WEIGH ON BIG BANKS - EURO PLUNGES AFTER GREECE DOWNGRADE - DOLLAR SURGES IN FLIGHT TO SAFETY - GREECE AND IRELAND UNDERPERFORM
FINANCE SECTOR TESTS SUPPORT... Link for todays video. The Financials SPDR (XLF) remains relatively weak over the last few months and the ETF is testing range support with a move lower today. Chart 1 shows XLF breaking below the triangle trendline and then stalling around 14.25 the previous seven days. In fact, this seven day range is the narrowest of the year. At this point, I would score two for the bears (relative weakness and triangle break). Look for a range break to provide the next clue. A move below the seven day low would be bearish and argue for a decline into the bigger support zone (yellow). A move above the seven day high would negate the triangle break and argue for a bounce.
Chart 1
REGIONAL BANK SPDR HITS RESISTANCE... After an advance the last six weeks, chart 2 shows the Regional Bank SPDR (KRE) hitting trendline resistance. KRE peaked in early August and has been working its way lower the last 4 months. The decline looks like one big falling wedge with resistance around 21.7 (upper trendline). Resistance became clear when KRE surged above 21.7 and then plunged below 21 for a weak close the very same day (long red candle). KRE has since firmed with a small triangle the last few weeks. A break above triangle resistance and the wedge trendline would be most positive. For signs of weakness, I am watching the trendline extending up from early November and the December low. A break below both would reverse the six week uptrend.
Chart 2
BROKER-DEALER ISHARES CONSOLIDATES... Chart 3 shows the Broker-Dealer iShares (IAI) trading near its November-December lows. The ETF was hit hard in October and found support around 27. After an oversold bounce that formed a lower high, the ETF was again hit with selling pressure in November and tested support around 27 again. Two things are bearish here. First, the ETF formed a lower high in mid November and is trending lower the last 2-3 months. Second, the ETF is underperforming the S&P 500. Relative weakness and a downtrend favor the bears. For December, IAI traced out a triangle consolidation. A break below triangle support would call for a downtrend extension, while a break above 28 would be positive.
Chart 3
DOWNGRADES WEIGH ON BIG BANKS... Meredith Whitney Advisory Group downgraded Morgan Stanley (MS) and Goldman Sachs (GS) before the bell this morning. Whitney, previously a managing director at Oppenheimer & Co, is best known for turning bearish on Citigroup in October 2007. While past performance does not guarantee future performance, Whitney appears to have some pretty good street cred. Chart 4 shows Goldman Sachs peaking in October and forging a lower low this month. Goldman is clearly trending lower with the next support zone around 150-157. Support from the August lows and broken resistance from the June highs combine to mark potential support here. Goldman is also showing some serious relative weakness in November-December. The indicator window shows GS (blue) moving lower as the S&P 500 (red) moves higher. Chart 5 shows Morgan Stanley (MS) breaking below its early November low at 31. Even though the stock firmed since breaking below support, it has not been able to bounce and continues to underperform the S&P 500.
Chart 4
Chart 5
EURO PLUNGES AFTER GREECE DOWNGRADE... Even though the credit rating agencies are not known for being ahead of the curve, it appears that sovereign debt downgrades still carry some weight in the market. Standard & Poors downgraded Greeces credit rating for the second time this year. Greece is part of the Euro-zone and its financial woes are weighing heavily on the Euro. Chart 6 shows the Euro ETF (FXE) breaking two trendlines and moving below its early November low. The trend was up from March to November, but appears to have reversed course in December. The bottom indicator window shows the Euro ETF and Gold ETF (GLD). These two have been positively correlated the last 10 months. That positive correlation continues as both declined sharply in December. While gold may have some safe-haven status, weakness in the Euro is currently putting downward pressure on bullion.
Chart 6
DOLLAR SURGES IN FLIGHT TO SAFETY... Chart 7 shows the DB Dollar Bullish ETF (UUP) surging above two trendlines in December. Broken support from the August lows turned into resistance in September and November (yellow area). With todays big gain, UUP is entering this resistance zone for its first major test. But how will this affect the stock market? Stocks and the Dollar enjoyed an inverse relationship from March to November. Stocks advanced as the Dollar declined. Should this relationship hold, the December surge in the Dollar could weigh on stocks. The Dollar is viewed as a safe-haven in times of uncertainty. Stocks, on the other hand, benefit from the risk-on trade, which entails weakness in the Dollar. With the Dollar surging, the risk trade may take a back seat and this would be detrimental to stocks.
Chart 7
GREECE AND IRELAND UNDERPERFORM... A Perfchart of some key European stock indices reveals the countries under pressure. Even though the United Kingdom is not part of the Euro zone, its proximity makes it an intricate part of European business so I have included it. Chart 8 shows Ireland and Greece as the weakest links. Relative weakness in the DJ Ireland Index ($IEDOW) started in October as the returns turned negative in the second half of the month. The Athens General Index ($ATG) started showing relative weakness in mid November and the index is down some 15% since early October. In contrast to Ireland and Greece, the four other European indices show gains over the last 52 days. Although not by much, note that the Madrid General Index ($SMSI) is the weakest of the other group. Spains credit rating was also downgraded by Standard & Poors last week. While not many expect these Euro-zone countries to default on their debt, the credit down grades increase interest rates for the borrowers. This simply increases the debt burden at a time when these countries can least afford it. By extension, increased uncertainty puts downward pressure on the Euro. Interested parties should also take a look at Italy.
Chart 8
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