JANUARY ROTATION OUT OF EMERGING MARKETS AND BASIC MATERIALS INTO CONSUMER STAPLES AND HEALTCHARE SHOWS MOVE AWAY FROM RISK AND TOWARD SAFETY -- TECHNOLOGY IS FALLING HARD TODAY AND IS PULLING REST OF MARKET LOWER

MARKETS TURN RISK AVERSE... Arthur Hill has been showing the recent rotation out of former market leaders and into defensive market sectors that are considered to be risk averse. It's an important point that bears repeating. While it's important to look at the technical condition of major market indexes (which are weakening), it's also important to know what's going down the fastest and what groups are holding up best. That also tells us something about the currrent market mood and deterioration in riskier assets. Chart 1 is intended to paint a visual picture of what's going on. The four colored lines are plotted relative to the S&P 500 (the flat black line). In other words, they show the "relative" performance of the four lines. The two top lines show the January downturn in the relative performance of Emerging Market iShares (pink line) and basic material stocks (green line). That makes perfect sense since weakness in large emerging markets like China and Brazil have started to take a heavy toll on commodity markets and stocks tied to commodities. The two bottom lines show an upturn in the relative performance of healthcare and consumer staple ETFs, which are defensive in nature. That's where money usually goes when investors sense a market downturn. Another group that usually loses favor during a downside correction is technology. That's certainly the case today.

Chart 1

TECHNOLOGY FALLS HARD TODAY... Technology stocks are falling especially hard today and are pulling the rest of the market lower. The weakest index is the Nasdaq 100 which is dominated by large technology shares. Chart 2 shows the PowerShares QQQ Trust tumbling 3% and pushing it to the lowest level in two months. The chart shows the 50-day average (which was broken last week) now acting as resistance (which is the case which other market indexes as well). I've written several times in the past that the relative performance of the technology sector is a key barometer of market direction. The QQQQ/SPX ratio on top of Chart 2 had been rising since last March as technology led the market higher. The drop in the ratio during January shows that technology is now leading the market lower. That greatly increases the odds for a continuing correction.

Chart 2

DAILY EMA LINES TURN NEGATIVE ... One of our readers asked for an update on the 13-34 EMA combination that I place a lot of importance on. This is a good time to revisit that system because the daily EMA lines have turned negative for the first time in six months. Chart 3 shows the 13-day EMA (blue line) crossing below the 34-day EMA (red line). That's a short-term sell signal. The black line below Chart 3 plots the "difference" between the two EMAs. Although the line started dropping more than a week ago, it has just dropped below its zero lines (which is another way of spotting the negative EMA crossover). [To create the lower line, insert 13,34,1 into the MACD indicator. At other times, use the default 12,26, 9 numbers]. Chart 4 shows the "weekly" version of the 13-34 EMA combination. The good news is that the two weekly lines are still positive. The bad news is the the spread between the two (the black line) has started to drop for the first time since last March. That's indicative of a likely downside correction of intermediate proportions which usually means a drop of at least 10%.

Chart 3

Chart 4