TECHS LEAD THE MARKET LOWER - A ROUGH MONTH FOR TECHNOLOGY - FROM BIG BANKS TO BIG TECHS - VOLATILITY SPIKES - MAJORITY OF STOCKS STILL ABOVE THEIR 200-DAY SMA - PERCENT ABOVE THEIR 50-DAY SMA PLUMMETS

TECHS LEAD THE MARKET LOWER ... Link for todays video. John Murphy is away this week and will return next week. Stocks came under pressure again on Friday with the technology sector leading the way lower. Chart 1 shows the Nasdaq 100 ETF (QQQQ) breaking below consolidation support on Thursday and extending its decline on Friday. The current decline is the sharpest since late October. While the decline certainly looks intimidating, it is still not enough to reverse the medium-term uptrend. QQQQ is up almost 20% since early September and up around 13% since early November. Some sort of pullback or correction can certainly be expected after such a run. Thursdays consolidation support break got it started. Key support on the daily chart remains around 43. There is probably some sort of support zone in the 43-44 area from the prior consolidation, which ran from late October to early November. QQQQ is fast approaching this support zone and becoming short-term oversold. Chart 2 shows the Technology SPDR (XLK) nearing its support zone after a 4.75% decline this month.

Chart 1

Chart 2

A ROUGH MONTH FOR TECHNOLOGY ... The next two charts show the offensive and defensive sectors. Offensive sectors include technology, consumer discretionary, industrials and finance. I call them the offensive sectors because their participation is key to a bull market. Technology represents growth and the appetite for risk. Consumer discretionary is the most economically sensitive sector. Industrials represent big global manufacturers like GE, United Tech, 3M, Boeing and Caterpiller. Finance represents the banking system. Chart 3 shows that technology SPDR (XLK) is by far the weakest in 2010. The appetite for risk and growth is not strong in 2010. The industrials sector is holding up the best of the four (thanks to a gain from GE today). Healthcare, utilities and consumer staples make up the defensive sectors shown in chart 4. These are the sectors investors turn to in times of uncertainty. Utilities are down sharply. Consumer staples are also down, but not near as much as technology or consumer discretionary. The healthcare sector remains the star performer for the year - and the only sector showing a year-to-date gain.

Chart 3

Chart 4

FROM BIG BANKS TO BIG TECHS... Big banks weighed on the stock market on Thursday. Big techs took over on Friday. Even though Google (GOOG) beat expectations on Friday, sellers overwhelmed buyers and pushed the stock sharply lower. Chart 5 shows Google peaking above 620 in early January and declining below 560 today. The stock advanced from 400 to 620 (July to January) for a 55% gain. It seems that some pretty good expectations were already built into prices after such an advance. There is an old Wall Street adage: buy-the-rumor and sell-the-news. Well, earnings expectations were the rumor and the actual earnings report was the news. With the sharp January decline, Google is entering its first support zone around the 38% retracement. The Fibonacci Retracements Tool extends from the July low to the January high.

Chart 5

Chart 6 shows Apple (AAPL) breaking below support with a sharp decline today. The stock broke triangle resistance in late December and this breakout turned into support in early January. Todays selling pressure proved too much. The next support level is around 185-190 from the Nov-Dec lows. Chart 7 shows Cisco (CSCO) failing to hold its triangle breakout and plunging to support from the Nov-Dec lows.

Chart 6

Chart 7

VOLATILITY SPIKES... Fear and uncertainty are moving into the market as the S&P 500 Volatility Index ($VIX) and Nasdaq 100 Volatility Index ($VXN) surge over the last few days. Chart 8 shows the VIX with its biggest surge since January 2009. Chart 9 shows VXN with its biggest surge since November 2008. A surge in these fear indices is negative for the stock market. Notice that the Nasdaq 100 and S&P 500 both advanced as their respected volatility indices fell (March to December). There was a surge in October, but resistance ultimately held and the volatility indices moved to new lows. It may be different this time. First, both VIX and VXN broke their March trendlines. Second, both exceeded their December highs. The sharp surge smacks of a panic, but it is clear that traders have seen something to be panicked about. A further advance in these volatility indices would be negative for stocks.

Chart 8

Chart 9

MAJORITY OF STOCKS STILL ABOVE THEIR 200-DAY SMA... Breadth stats measure the degree of participation. An advancing market with broadening participation is positive, but an advancing market with narrowing participation is negative. Breadth indicators include Net New Highs, Advances versus Declines, Bullish Percent Indices and Percentage of Stocks above their 200-day Moving Average. Focusing on the latter, I noticed that there are fewer stocks above their 200-day moving average. However, more stocks are still above their 200-day moving average than below. In general, a stock is trending higher when above its 200-day and trending lower when below. Because the 200-day moving average covers 8-9 months, it can be considered a long-term moving average that defines the long-term trend.

Chart 10 shows the percentage of Nasdaq stocks above their 200-day moving average ($NAA200R). Over 80% of Nasdaq stocks were above their 200-day moving averages in September. Even though the Nasdaq moved to a new 52-week high in January, fewer than 70% of Nasdaq stocks were above their 200-day moving average this month. This tells us that fewer Nasdaq stocks participated in the advance from October to January. Narrowing participation is a negative sign for the advance. However, dont forget that 65% of Nasdaq stocks are still trading above their 200-day moving average. That means that only 35% are trading below their 200-day moving average. Even though fewer stocks are participating, the majority of stocks remain above their 200-dag moving average and this is positive. The trouble starts when the indicator moves below 50%.

Chart 10

Chart 11 shows the percent of NYSE stocks trading above their 200-day moving averages ($NYA200R). Over 90% of NYSE stocks were above their 200-day moving average in September. The NY Composite moved to a new 52-week high in January, but the indicator did not exceed its September high. Fewer stocks participated in the advance from October to January. However, over 80% of NYSE stocks remain above their 200-day moving average. While participation narrowed, it has not narrowed enough to turn this indicator bearish. The long-term uptrend will be in jeopardy when fewer than 50% of stocks are trading above their 200-day moving averages.

Chart 11

PERCENT OF STOCKS ABOVE 50-DAY SMA PLUMMETS... For a shorter timeframe, we can look at the percent of stocks trading above their 50-day moving average. 50 days covers just over two months of trading, which is considerably less than 200 days (1/4). Chart 12 shows the percentage of NYSE stocks above their 50-day moving average ($NYA50R). This indicator plunged below 50% in late June and late October (red lines). The June plunge signaled the start of the June-July correction, but the October plunge coincided with a relatively short-lived decline. Not all moves below 50% result in an extended correction. With market weakness the last few days, the indicator plunged below 65%. Further weakness below 50% would increase the odds of an extended correction phase. As far as the end of the correction, notice that the indicator bottomed around 30% in early July and early November. For reference, Chart 13 shows the percentage of Nasdaq stocks above their 50-day moving average ($NAA50R).

Chart 12

Chart 13