DOW INDUSTRIALS AND TRANSPORTS CHALLENGE JUNE HIGHS -- SMALL-CAPS TAKE THE LEAD ON THE UPSIDE -- HOMEBUILDERS EXTEND SURGE AS NEW HOME SALES EXPAND -- NYSE AD LINE BREAKS ABOVE JUNE HIGH -- NYSE NET NEW HIGHS SURGE TO 12 WEEK HIGH
DOW INDUSTRIALS AND TRANSPORTS CHALLENGE JUNE HIGHS... Link for todays video. The Dow Industrials and Transports are leading the July charge as both challenge their June highs. Chart 1 shows the close-only line chart for the Dow Industrials. The senior Average broke its wedge trendline in mid July and traded above the June high Monday afternoon. Notice how the trendline extension turned into support during last weeks pullback. With two lows around 10100 the last two weeks, this level becomes the first key support level to watch. The indicator window shows the 20-day Aroon Oscillator, which is a momentum oscillator that displays the difference between Aroon Up and Aroon Down. The Aroon oscillator is positive when Aroon Up is above Aroon Down and negative otherwise. After a few weeks in negative territory, this momentum oscillator surged above 50 for the first time since early May.
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Chart 1
Chart 2 shows the Dow Transports with characteristics similar to the Dow Industrials. The Transportation Average broke the wedge trendline with last weeks surge and is challenging resistance from the mid June high. The mid July low marks support at 4100. Also notice that the Aroon oscillator moved above 50 for the first time since early May. Dow Theory was on a clear sell signal in early July as both Averages forged lower lows. Dow Theory first turned bearish when both Averages formed lower highs and then broke their early May lows. This Dow Theory sell signal would be reversed if both close above their June closing highs. Even though the market is looking stronger over the last two weeks, keep in mind that the Dow is up some 8% from its July low and the Dow Transports is up over 14% from its July low. Both are getting short-term overbought after such big moves.
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Chart 2
SMALL-CAPS TAKE THE LEAD ON THE UPSIDE... Relative weakness in small-caps characterized the May-June decline in stocks. This relationship changed last week as small-caps led the market charge and started outperforming again. There are at least two ways to analyze relative performance. Chartists can use a price relative or PerfCharts. Chart 3 shows the price relative comparing the performance of the Russell 2000 ($RUT) to the S&P 100 ($OEX). This is simply a ratio plot of the two price series ($RUT:$OEX). The ratio advanced from the first week of February to the second week of May when small-caps (Russell 2000) outperformed large-caps (S&P 100). There was also a broad advance in stocks during this period. This ratio peaked the second week of May and forged a lower low in mid July. Small-caps underperformed large-caps during this timeframe and led a broad decline in stocks. With last weeks advance in stocks, the price relative surged above its early July high and broke the trendline extending down from late May. This shows that small-caps are starting to outperform again, which is positive for the market overall. Small-caps are like the canaries in the coal mine. On the downside, fears of a double dip recession hit small-caps harder than large-caps in May-June. On the upside, positive earnings reports are boosting small-caps more than large-caps recently. Chart 4 shows the S&P Market Capitalization PerfChart comparing the performance of the S&P 500, S&P 400 Midcap Index and S&P 600 SmallCap Index over the last 10 days. Small-caps and mid-caps are up more than large-caps.
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Chart 3
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Chart 4
HOMEBUILDERS EXTEND SURGE AS NEW HOME SALES EXPAND... The Homebuilders SPDR (XHB) and Home Construction iShares (ITB) continued moving higher after new home sales surged 23.6% in June, which was better-than-expected. Chart 5 shows XHB finding support around 14 in early and mid July. With the surge over the last five trading days, the ETF broke above the blue trendline and exceeded its mid July high. In fact, the ETF formed a higher low in mid July. So far XHB has a higher low and a higher high, which makes for a new uptrend. Key support is based on last weeks low. The indicator window shows the price relative, which compares the performance of XHB to the S&P 500 ETF. This ratio plot (XHB:SPY) broke above its mid July high as well. Relative weakness in homebuilders weighed on the consumer discretionary sector in May-June. Newfound relative strength in this key sector is positive for the overall market. Chart 6 shows the Home Construction iShares (ITB) with a similar pattern.
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Chart 5
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Chart 6
NYSE AD LINE BREAKS ABOVE JUNE HIGH... Chart 7 shows the NYSE AD Line ($NYAD) breaking above its mid June high. John Murphy showed the percentage of stocks above the 200-day moving average expanding last week. The AD Line is also a breadth indicator that shows broadening participation in the advance. The AD Line is a cumulative measure of Net Advances (advancing stocks less declining stocks). This indicator can be analyzed just like any other price plot. Lower lows and lower highs denote a downtrend. Higher lows and higher highs denote an uptrend. The AD Line was in a downtrend from mid May until mid July with a series of lower lows and lower highs (blue arrows). With the surge over the last few weeks, the AD Line broke above its mid July high to reverse this downtrend. The bottom window shows Net Advances. This indicator surged above +2000 at least three times in July and has yet to break below -2000. Net Advances are clearly strong on up days than on down days this month. Chart 8 shows the **Nasdaq AD Line ($NAAD)* forming a higher low in mid July and surging the last few days. It remains well below its June high, but is on the verge of taking out its July high.
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Chart 7
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Chart 8
NYSE NET NEW HIGHS SURGE TO 12 WEEK HIGH... Chart 9 shows the **NYSE Net New Highs ($NYHL)* in the lower window and cumulative Net New Highs line in the big window. Net New Highs is simply the number of new 52-week highs less the number of new 52-week lows. Notice that Net New Highs were stuck in a range from early May to mid July. Support was around -100 and resistance was around +100. With last weeks surge in stocks, NYSE Net New Highs surged to 160, which is the highest level since the beginning of May. Also notice that the cumulative Net New Highs line turned up. This is positive for the non-tech side of the market. Chart 10 shows Nasdaq Net New Highs edging into positive territory the last few days. Nasdaq Net New Highs ($NAHL) are not as strong as NYSE Net New Highs. Also notice that the cumulative Net New Highs line for the Nasdaq has yet to turn up.
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Chart 9
