MARKET BOUNCE CONTINUES OFF FEBRUARY LOW -- SHORT-TERM OUTLOOK IMPROVES FOR RISK ASSETS -- SECTOR LEADERS INCLUDE AIRLINES AND CHIPS -- MARKET MAY BE STARTING SUMMER RALLY
VIX TURNS BACK DOWN... A couple of months ago, we warned that an upturn in the CBOE Volatility (VIX) Index signalled a market correction that could take the major stock indexes back to their February lows. The good news is that the February lows have held and the market's short-term trend is improving. The green line in Chart 1 shows "hourly" prices for the S&P 500 challenging the June high. The red line shows the VIX Index (which trends in the opposite direction) having broken chart support at 30. A short-term breakdown in the VIX increases the odds for an upside breakout in the S&P 500. Stocks aren't the only market rallying. So are other risk assets including foreign stocks (especially Europe and China), most commodities (like copper and oil), and most foreign currencies (especially the higher-yielding Australian and Canadian Dollars), and high-yield bonds. Treasury bonds, the dollar, and gold are on the defensive.
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Chart 1
AIRLINES LEAD TRANSPORTS HIGHER... Another encouraging sign is the ability of some economically-sensitive stock groups to hold above their 200-day moving averages. Take the transports for example. The Dow Transports (not shown) are trading well above their 200-day line and in the process of challenging their June high and 50-day line. As Arthur Hill has pointed out repeatedly, airlines are leading the transports higher. In fact, Chart 2 shows the Airline Index (XAL) hitting a new 52-week high today. The top stock in that group in Continental Airlines which is also hitting a new 52-week high (Chart 3). JetBlue isn't far behind (Chart 4).
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Chart 2
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Chart 3
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Chart 4
SANDISK LEADS SOX HIGHER... Another group helping pull the market higher is semiconductors. Chart 5 shows the Semiconductor (SOX) Index well above its 200-day line and challenging its June high and 50-day line. An upside breakout is likely. One of the reasons why can be seen in two of its leading stocks that are hitting new 52-week highs today. They include Sandisk (Chart 6) and Novellus (Chart 7). It's usually a good sign for the Nasdaq (and the rest of the market) when chip stocks are showing market leadership, as they're doing today.
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Chart 5
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Chart 6
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Chart 7
% NYSE STOCKS OVER MA LINES ARE OVERSOLD... A lot of attention will be paid to the ability of stocks indexes (and most stocks) to climb back above their 50- and 200-day moving averages in the days ahead. That being the case, it's encouraging to know that the percent of NYSE stocks currently trading above those MA lines is very oversold. The blue line in Chart 8 shows the % NYSE stocks trading above their 50-day average. The recent reading at 10% is the lowest since March 2009 and is very oversold. The red line in Chart 9 shows the % NYSE stocks trading over their 200-day averages. We've pointed out several times before that bull market corrections usually find support between 40% and 50% (as happened between 2004 and 2006). The recent lowpoint near 45% puts that line in oversold territory as well. That also increases the odds that a lot more stocks should start climbing back over their 200-day lines.
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Chart 8
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Chart 9
S&P 500 TESTS JUNE HIGH... The S&P 500 is currently challenging two overhead resistance points. The first is the early June intra-day peak near 1105. The second is its 200-day average (red line) that currently sits at 1108. A close above both lines would turn its short-term higher. How much higher? Possibly back to its 50-day average (currently at 1143) or maybe even to its January high at 1150 (a two-thirds retracement of its spring drop). Seasonal factors that turned negative in May are starting to turn more positive (at least over the next month). The traditional summer rally usually kicks in near the end of June and lasts well into July. After that, seasonal trends turn negative into the autumn. My best guess at this point is that the market has put in a short- to intermediate-term bottom which could carry the market higher into the summer. The next big challenge could take place in the autumn when recent lows may be retested again. There's a more possible negative scenario which I almost hesitate to mention at this point. It is possible that the current rally could be the start of a "right shoulder" in a head and shoulder top. For that more negative scenario to develop, however, the S&P 500 would have to break its recent lows. A more positive view is that the market has simply entered into a trading range that could last for several months. In either case, there's a good chance that the recent lows will be retested in the second half of the year.
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Chart 10
BEAR FUNDS TURN DOWN ... Another sign of an improving short-term trend is the fact that some inverse funds are at or close to breaking initial support levels. Chart 11 shows the ProShares Short S&P 500 Fund breaking initial chart support at 51.53. Chart 12 shows the ProShares UltraShort QQQ testing support near 17. I recently suggested taking some profits in both bear funds when they failed to exceed or stay above their 200-day lines. It may be time to sell some more (at least until the market bounce runs its course).
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Chart 11
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Chart 12
HIGH-YIELD BONDS TURN UP ... High-yield corporate bonds have shown a relatively close correlation with stocks. It's good news, therefore, to see the High Yield iShares (HYG) hitting a new monthly high today (Chart 13). That shows that traders are feeling a bit more optimistic about things (and more willing to assume some risk). Another way to measure that is via the high-yield/investment grade bond ratio which is the green line below Chart 13. That line has started rising for the first time since April. That shows that high-yield bonds are now rising faster than investment grade. On June 1, I showed the Investment Grade ETF (LQD) slipping below its 50-day average. Fortunately, it's now back above that support line and has kept its uptrend intact. While investors are taking some profits in safe-haven Treasuries, most of that fixed income money is flowing into riskier corporate bonds.
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Chart 13
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Chart 14
CHINA ISHARES RALLY ... We expressed concern earlier in the spring about weakness in the Chinese stock market. Our concern was about global stocks and commodities that are closely tied to China. Chart 15, however, shows China iShares trading at a six-week high and cllmbing above their 50-day average. That's also supportive to a summer bounce in global stocks, commodities, and foreign currencies -- especially those tied to commodities like the Canadian Dollar (Chart 16).
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Chart 15
