MOMENTUM TURNS BEARISH FOR MATERIALS SPDR -- A KEY TEST FOR THE STEEL ETF -- CONSUMER STAPLES LEAD MIXED MARKET -- TOBACCO STOCKS LEAD CONSUMER STAPLES HIGHER -- EURO ETF CONSOLIDATES AT RESISTANCE -- INTEREST RATES CONTINUE TO FALL
MOMENTUM TURNS BEARISH FOR THE MATERIALS SECTOR... Link for todays video. The Materials SPDR (XLB) showed some relative weakness on Monday as the sector with the second largest loss (behind energy). Chart 1 shows XLB with a rather volatile range since late May. XLB tested the February low with two long white candlesticks in May, but then broke to new lows with a plunge in early June. The ETF recovered along with the broader market and broke above its late May high. However, this breakout did not hold very long. In fact, this breakout held less than one day. XLB appeared to break resistance with a strong open last Monday, but the ETF moved lower after the open and closed below resistance. No breakout. Further more, XLB declined sharply the last few days and CCI broke below zero. This centerline tells us when the momentum cup is half full (bullish bias) and half empty (bearish bias). The red and green dotted lines show prior crosses. These signals are not perfect, but they can be used in conjunction with other technical indications. At this point, the failed breakout and last weeks sharp decline are bearish until proven otherwise. XLB tried to firm near the 62% retracement on Friday and then fell back again on Monday. At the very least, look for a break above 30.5 to revive the bulls. A close above resistance at 31.2 is needed to fully reverse the downtrend.
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Chart 1
A KEY TEST FOR THE MARKET VECTORS STEEL ETF ... Chart 2 shows the Market Vectors Steel ETF (SLX) with a rising wedge over the last few weeks. This wedge retraced 38-50% of the April-May decline. For now, the wedge is still rising as SLX tests the lower trendline. The indicator window shows the Commodity Channel Index (CCI) testing the zero line as the ETF tests its wedge trendline. Prior zero line crosses (green/red lines) generated pretty good signals in the recent past. Even though past performance does not guarantee for future performance and indicators can produce whipsaws, a CCI move into negative territory would be bearish for momentum. This would likely coincide with a break below the wedge trendline. A key test lies ahead this week for the Market Vectors Steel ETF.
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Chart 2
CONSUMER STAPLES LEAD MIXED MARKET... The Consumer Staples SPDR (XLP) showed some relative strength as the sector with the largest gain on Monday. Even though XLP has been following the broader market since late April, it is holding up better on a percentage basis. Chart 3 shows XLP testing support from the February-May-June lows with a bounce today. This is the third bounce off the support zone in the last five weeks. The indicator window shows XLP relative to the Consumer Discretionary SPDR (XLY). These are two diametrically opposed sectors. Consumer staples represent necessities such as soap, toothpaste, groceries and tobacco. Consumer discretionary represents non-necessities such as clothes, electronics and restaurants. The overall market performs best when the consumer discretionary sector outperforms the consumer staples sector. Conversely, stocks perform poorly when the consumer staples sector outperforms. This reflects a defensive market that is risk adverse. As the chart shows, the price relative broke triangle resistance and edged above its May high. The consumer staples sector is outperforming the consumer discretionary and this is negative for the market overall. Notice how the consumer staples underperformed from February to late April. This period was positive for the stocks.
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Chart 3
TOBACCO STOCKS LEAD CONSUMER STAPLES HIGHER... A surge in stocks of tobacco companies is helping the consumer staples sector. There are also gains to be found in Wal-mart (WMT), Procter & Gamble (PG), Kroger (KR) and Coca-cola (KO). Tobacco stocks were up after the Supreme Court rejected an attempt by the Justice Department to grab as much as $280 billion in tobacco company profits. Chart 4 shows Reynolds America (RAI) holding its February low in late May and working its way higher in June. The stock surged over 4% on Monday. Chart 5 shows Altria (MO) holding well above its February low and surging above resistance with a high volume move on Monday. Chart 6 shows Kroger (KR) with a pennant consolidation over the last six days. A move above 20.5 would break pennat resistance, while a break below 19.8 would break pennant support.
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Chart 4
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Chart 5
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Chart 6
EURO ETF CONSOLIDATES AT RESISTANCE... Chart 7 shows the Euro ETF (FXE) surging in mid June and then stalling the last two weeks. The ETF has traded between 122 and 124 since June 15th. What happens at resistance could affect US stocks. A break above the June highs would signal a continuation of the mid June advance and project further strength. Another bounce in the Euro would show some confidence in the European debt situation and this could provide a lift for US stocks. This would stimulate the appetite for risk. Failure to break above 124 and a break below 122 would argue for a continuation of the downtrend. This could trigger a flight to safety that would be negative for US stocks and oil. The indicator window shows RSI meeting resistance in the 50-60 zone for at least the third time since March. A break above 60 is needed to turn momentum bullish.
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Chart 7
INTEREST RATES CONTINUE TO FALL... The 10-Year Treasury Yield ($TNX) fell further today and forged another new 52-week low. Chart 8 shows the yield breaking triangle support last week and falling below 3.10% today (31 on the chart). The indicator window shows the 10-Year Treasury Yield along with the S&P 500. As John Murphy wrote last week, stocks and interest rates have been positively correlated the last few years. Most recently, both declined from April until June. The S&P 500 remains above its June low, but the 10-Year Treasury Yield broke below its June low. Should this positive correlation hold, we can expect stocks follow yields lower. Chart 9 shows the 10-Year Treasury Yield breaking below its September 2009 low over the last two weeks. This is also negative for stocks.
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Chart 8
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Chart 9
1-YEAR TREASURY YIELD FORESHADOWS STOCK MARKET... While looking through the various Treasury yields, I noticed that the 1-Year Treasury Yield ($UST1Y) appears to lead stocks over the last 6-7 months. This leading relationship will not last forever, but right now it is bearish for stocks. The green arrows show bottoms and the red arrows show tops for the 1-year yield. Notice how the stock market follows the 1-year yield 4-5 weeks later. The 1-year yield surged in December and stocks advanced from mid December to late January. The 1-year yield peaked in late December and stocks peaked in late January. The 1-year yield bottomed in late January and stocks bottomed in early February. Most recently, the 1-year yield peaked in early April and stocks peaked in late April. The 1-year yield hit a new low for the move just last week so we have yet to see a bottom. A break above .32 would reverse this downtrend and project a bullish reversal in stocks a few weeks later. Falling rates signal money moving into treasuries. Money spent for treasuries is money not available for stocks. Conversely, rising rates signal moving out of treasuries. Money from treasuries is money available for stocks.
