S&P 500 SURGES TO HOLD FEBRUARY LOW -- RUSSELL 2000 BOUNCES OFF KEY RETRACEMENT -- SMALL CAP PERFORMANCE FLATTENS -- AIRLINES LEAD THE MARKET HIGHER -- AMR AND CAL SURGE -- HOMEBUILDERS FIRM AT SUPPORT -- PHM AND TOL HIT KEY RETRACEMENT
S&P 500 SURGES TO HOLD FEBRUARY LOW... Link for todays video. The February low represents the last big reaction low and an important support zone for the S&P 500. A break below this support zone would forge a lower low and signal the start of a bigger downtrend. Even though the S&P 500 is fighting hard to hold support, it has not been able to put together two consecutive advances since late April. We have seen two intraday recoveries and a big surge last week, but strong follow through remains elusive. With the decline back below 1080, chart 1 shows a reaction high just above 1100 that becomes key resistance. Follow through above this level with strong volume and breadth would be quite positive. Todays big advance is a good start. Speaking of volume, I noticed that volume on the Friday-Tuesday pullback was rather low. While this could be pre and post holiday doldrums, low volume on the decline signals a letup in selling pressure. Now, the key is to see volume expand on any advance or breakout.
(click to view a live version of this chart)
Chart 1
The indicator window shows the Commodity Channel Index (CCI) with a sharp bullish divergence. This momentum oscillator also formed a bullish divergence in January-February. The confirming signal came with a break above the early February high. Applying the February lesson to today, we can look for a break above the mid-late May highs to turn bullish on momentum.
RUSSELL 2000 BOUNCES OF BROKEN SUPPORT WITH BIG MOVE... Chart 2 shows the Russell 2000 ($RUT) firming around 640 over the last few weeks. The index touched 640 on the flash crash, dipped below 620 last week and is testing 640 this week. Support in this area stems from broken resistance, the rising 150-day moving average and the 62% retracement. I can hear the questions already. Why the 150-day and not the 200-day moving average? It really boils down to personal preference. First, I like the timeframe. 150 days is around 6-7 months or half a year. Second, this moving average was broken in late April 2009 and held in July and February. Another test is upon us. As far as the trend is concerned, this is a make-or-break area for the Russell 2000. Signs of firmness around 640 are positive, but we need a break above resistance to actually reverse the five week slide. CCI is also shown in indicator window with a bullish divergence. A break above 50 would turn momentum bullish.
(click to view a live version of this chart)
Chart 2
SMALL-CAP PERFORMANCE FLATTENS ... Last week, I wrote that small-caps were holding up better than large-caps because the Russell 2000 held well above its February low as the S&P 500 tested its February low. While this situation remains unchanged, we are starting to see relative weakness in small-caps over the last few weeks. PerfChart 3 shows the performance for five indices over the last 20 days. After Tuesdays sharp decline, the Russell 2000 is down the most of the five. This is a concern because small-caps are the higher beta stocks that represent the appetite for risk. Stocks perform well when the risk appetite is strong. Risk appetite is strong when small-caps outperform. Risk appetite is weak when small-caps underperform. This Perfchart will change after the Russell 2000 gained over 3% to led the major indices.
(click to view a live version of this chart)
Chart 3
Despite some relative weakness over the last four weeks, we have yet to see an actual breakdown in small-cap performance. Chart 4 shows the price relative method to measure relative strength. This is simply the ratio of the Russell 2000 to the S&P 100. The ratio rises when the Russell 2000 outperforms and falls when the Russell 2000 underperforms. Small-caps, as measured by the Russell 2000, have been outperforming large-caps the last six months as the price relative remains in a clear uptrend. Relative performance has flattened out over the last 5-6 weeks, but we have yet to see a breakdown. A move below the late May low would show relative weakness in the Russell 2000 and this would be negative for the market overall. For reference, the bottom window shows the actual close-only lines for Russell 2000 (black) and the S&P 100 (red).
(click to view a live version of this chart)
Chart 4
AIRLINES LEAD THE MARKET HIGHER... The Amex Airline Index ($XAL) is at it again with a big gain and relative strength. I featured $XAL last week as it surged above 37. After a two day pullback, chart 5 shows the index surging above 38 today. The index was even up three days in a row last week. Thats more than the S&P 500 can say at this point. With a move above the mid May high, airlines are clearly showing relative strength and upside leadership. The indicator window shows the price relative breaking above its March-April highs last week and continuing higher this week. Within the index, chart 6 shows American (AMR) surging above resistance last week and moving above 8 today. Chart 7 shows Continental (CAL) with a above its mid May high. Notice that CAL held above its early May low and showed relative strength before this breakout.
(click to view a live version of this chart)
Chart 5
(click to view a live version of this chart)
Chart 6
(click to view a live version of this chart)
Chart 7
HOMEBUILDERS FIRM AT SUPPORT... As John Murphy pointed out before, there are two very different homebuilding ETFs. Top holdings in the Homebuilders SPDR (XHB) include Owens Corning (5.33%), Sherwin Williams (4.71%), Williams Sonoma (4.70%), USG Group (4.43%) and Bed Bath Beyond (4.23%). While these companies are certainly tied to home building, they are not actual home builders per se. Top holdings in the Home Construction iShares (ITB), on the other hand, include NVR Corp (8.79%), Pulte (8.18%), DR Horton (7.89%), Toll Brothers (7.40%), Lennar (7.35%) and Home Depot (4.75%). The top five holdings are actual home builders. Despite differences in construction, these two ETFs track fairly closely. Both moved higher from December to April and declined over the last 6-7 weeks. In fact, current patterns look quite similar. Chart 8 shows the Home Construction iShares (ITB) finding support around 13 over the last few weeks. This support zone stems from broken resistance, the 62% retracement and the rising 150-day moving average. Even though support looks robust, the 6-7 week trend remains down as a falling wedge takes shape. Look for a break above the upper trendline and last weeks high to reverse this slide. Chart 9 shows the Homebuilders SPDR with similar characteristics.
(click to view a live version of this chart)
Chart 8
(click to view a live version of this chart)
Chart 9
(click to view a live version of this chart)
Chart 10
