GOLD AND BONDS SURGE TOWARDS MAY HIGHS -- SMALL CAPS LEAD THE MARKET LOWER -- HEALTHCARE AND UTILITIES HOLD UP IN WEAK MARKET -- LONG-TERM MOMENTUM INDICATOR BREAKS BULL RANGE -- PERCENT OF STOCKS ABOVE 50-DAY SMA BREAKS DOWN
GOLD AND BONDS SURGE TOWARDS MAY HIGHS... Link for todays video. Stocks were weak in Asia, Europe and the US today. Oil and copper followed suit with losses as well. Chart 1 shows Copper Futures ($COPPER) breaking below their February (closing) low on Friday. This is an end of day chart (EOD) that is updated a few hours after the close. Also notice how close copper and the S&P 500 are linked. Copper is weakening along with the stock market because weakness in the stock market increases the chances of a downturn in the economy, which would dampen demand for this key industrial metal.
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Chart 1
The Euro was also weaker on Monday, but losses were rather limited. Bonds, gold and natural gas were the only bright spots. Natural gas is probably not part of the flight to safety trade though. Gold and bonds, however, are part of this risk-off trade. Chart 2 shows the Gold ETF (GLD) holding support and surging towards its May high on Monday. Todays gain is the biggest since the second week of May. Gold also resumed its outperformance versus the Euro. The indicator window shows FXE sinking to another new low with gold breaking above last weeks high. Chart 3 shows the 20+ Year Treasury ETF (TLT) gapping up on Friday and extending its gains today. Bonds continue to benefit from weakness in stocks and the Euro.
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Chart 2
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Chart 3
SMALL-CAPS LEADING THE MARKET LOWER... Last week I showed relative weakness in small-caps with a perfchart and flat performance with a price relative. Small-caps led the market lower on Friday with the Russell 2000 losing a whopping 5%. The index is led the market lower again on Monday with a 2.57% loss. PerfChart 4 shows the S&P 500, Russell 2000, S&P 400 Midcap Index, Nasdaq and Dow since April 29th. Small-caps and mid-caps are leading the way lower with the largest percentage losses.
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Chart 4
Chart 5 shows the Russell 2000 gapping down on Friday to affirm resistance around 67. The ETF failed at 67 in late May and again in early June. Overall, a falling wedge is taking shape to define the 6-7 week downtrend. Todays close is the lowest close since February and the February lows mark the next support level. As far as the downtrend is concerned, IWM needs to fill the gap and break above resistance to forge a reversal. The indicator window shows the price relative breaking the February trendline and moving below its late May low. This confirms relative weakness in small-caps, which is not a good sign for the market overall.
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Chart 5
HEALTHCARE AND UTILITIES HOLD UP IN WEAK MARKET... Eight of the nine sectors were down on Monday, but there were some pockets of strength in two defensive sectors. The Healthcare SPDR (XLV) had the smallest loss and the Utilities SPDR (XLU) managed a small gain. Chart 6 shows XLU breaking down with the rest of the market in early May and falling below 28 in late May. The ETF remains above its late May low with a consolidation over the last eight days. Look for a break from this consolidation to trigger the next directional clue. Even though XLU remains in a downtrend overall, it is holding up better than the S&P 500 ETF. The price relative bottomed in mid April and moved above its May high today. Relative to SPY, XLU is outperforming and shows relative strength.
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Chart 6
Chart 7 shows XLV within a clear downtrend. The ETF formed a lower high in late March and peaked well ahead of the broader market. XLV is down over 10% from its March highs and most recently gapped down on Friday. This gap established resistance just above 29.5. Even though XLV showed some relative strength today, a breakout at 29.5 is needed to show some absolute strength. Relative to SPY, XLV started outperforming in late April. This outperformance, however, is mostly due to relative weakness in SPY. In other words, SPY is down more than XLV and this makes XLV look relatively strong. It is the same with XLU. Notice that the price relative has been working its way higher even as the stock fell over the last six weeks.
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Chart 7
LONG-TERM MOMENTUM INDICATOR BREAKS BULL RANGE... Many oscillators fluctuate within ranges during bull markets and bear markets. This is especially true for oscillators with defined boundaries, such as RSI and the Stochastic Oscillator. As expected, the bull market range is higher than the bear market range. For example, 14-week RSI on the S&P 500 fluctuates between 40 and 80 in a bull market and 20 and 60 in a bear market. These levels may vary for securities with different characteristics. Chart 8 shows 14-week RSI for the S&P 500 with three ranges over the last 5 years. Notice how the indicator held the 50-80 zone in 2005, 2006 and 2007. Momentum shifted in January 2008 as the indicator broke below 40 and recorded a three year low. The subsequent bear market range held until June 2009. RSI broke above 60 in July 2009 and has been in bull market mode the last 11 months. With the market decline over the last six weeks, the indicator is currently at 39.53 and trading below 40 for the first time since June 2009. The S&P 500 is also trading below the February low. These are bearish developments for the long-term. The only caveat is that it is still Monday. There are four more trading days left in the week. Chart 9 shows the Russell 2000 ($RUT) with 14-week RSI. Notice that RSI broke below 40 and below its 2005-2006 lows in July 2007, six month ahead of the S&P 500. Small-caps showed relative weakness that foreshadowed the prior market peak.
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Chart 8
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Chart 9
PERCENT OF STOCKS ABOVE 50-DAY SMA BREAKS DOWN... Even though RSI is holding its bull market range, the percentage of stocks above their 50-day moving average broke its bull market range in May. Chart 10 shows the Nasdaq %Above 50-day SMA ($NAA50R). Like RSI and the Stochastic Oscillator, this indicator fluctuates between zero and one hundred (percent). In reality, the indicator rarely gets above 90 or below 10. From April 2009 until April 2010, the indicator fluctuated between 30 and 85, which we can call the bull market range. There were bounces off the 30-35% zone in November and February. After recovering from the early May flash crash, the indicator broke below its bull market zone with a decisive move below 30% in mid May. It is quite possible that the indicator will now move into a bear market zone with resistance somewhere in the 60-70 zone. Also note that the indicator established resistance just below 30 over the last two weeks. Look for a break above 30% to signal a reversal of the downtrend that started in April. Chart 11 shows the NYSE %Above 50-day SMA ($NYA50R) breaking to its lowest level since March 2009. The indicator has clearly broken out of its bull market range and may not be entering a bear market range.
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Chart 10
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Chart 11
LESS THAN 50% OF STOCKS ABOVE 200-DAY SMA... While the 50-day moving average works as a medium-term trend indicator, the 200-day moving average works as a long-term trend indicator. In general, the trend is up when stocks are above the 200-day and down when stocks are below their 200-day. Early last week, John Murphy voiced concern that both the Dow and the S&P 500 remained below their 200-day moving averages. We can take this one step further by looking at the percentage of stocks above their 200-day lines. This is a breadth indicator that shows what is happening with the average stock. Chart 12 shows the NYSE %Above 200-day SMA ($NYA200R) moving below 50% and below its May low last week. This is not a good sign. The indicator has been moving lower since its break down in early May. There was a battle around the 50% line the last few weeks, but the bulls are coming up short. Should this indicator shift from a bull market range to a bear market range, we might expect the 60 area to act as resistance in the future. Chart 13 shows the Nasdaq %Above 200-day SMA ($NAA200R) breaking below 50% in late May and moving below its May low last week.
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Chart 12
