YIELDS RISE AND BONDS FALL ON JOBS REPORT -- SMALL-CAPS START SHOWING RELATIVE STRENGTH -- UTILITIES UNDER PRESSURE AS RATES SURGE -- XLB AND XLY ARE ALREADY CHALLENGING SUMMER HIGHS -- SPY AND DIA HOLD WEDGE BREAKOUTS
YIELDS RISE AND BONDS FALL ON JOBS REPORT... Link for todays video. A better-than-expected employment report combined with positive revisions to July weighed on bonds. Bonds surged in August as the double-dippers took center stage. Sign of weakness in the economy favor lower interest rates and lose monetary policy. Todays employment report and upward revisions inspired the soft-landing crowd. Positive economic news increases the chances that the next Fed move will be to tighten monetary policy. Keep in mind that the bond market will make its move long before the Fed. Chart 1 shows the 20+ Year T-Bond ETF (TLT) falling below 104 with a sharp decline early Friday. Despite this decline, the big trend remains up and a correction was overdue. The ETF was up around 25% from its April low to its August high and up 10% from low to high in August. Bonds were clearly overbought and ripe for a consolidation or a pullback. Broken resistance around 102 turns into support and this area is confirmed by the April trendline. Should the economic numbers continue to improve, we could even see a move back to the bigger support area around 98. With stocks and bonds negatively correlated, such a move would be positive for stocks. Chart 2 shows the 10-Year Treasury Yield ($TNX) surging towards the April trendline.
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Chart 1
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Chart 2
SMALL-CAPS START SHOWING RELATIVE STRENGTH ... Relative weakness in small-caps weighed on the market from May until August. That might be changing as the Russell 2000 ($RUT) starts to outperform the S&P 100 ($OEX). The Russell 2000 represents small-caps and the S&P 100 represents large-caps. We can compare these two by creating a ratio chart ($RUT:$OEX). The Russell 2000 outperforms when the numerator ($RUT) rises more than the denominator ($OEX). This causes the ratio to rise. Chart 3 shows this ratio peaking in mid May and declining until mid August. Technically, the 3-4 month trend remains down. However, focusing on the last three weeks we can see a higher low forming in late August and a big surge into early September. This surge means small-caps are outperforming since mid August, which is a positive sign for the market overall. Small-caps are like the canaries in the coal mine when it comes to economic sensitivity. Smaller companies are less diversified and more vulnerable to swings in the domestic economy.
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Chart 3
UTILITIES UNDER PRESSURE AS RATES RISE... The Utilities SPDR (XLU) is the only sector SPDR to record a new 52-week high this week, but the ETF is showing relative weakness today with a small decline. Chart 4 shows XLU holding up quite well in August and breaking above its August high this week. The indicator window shows the XLU:SPY ratio in a clear uptrend as XLU outperforms. Despite strength, XLU may not fair so well if stocks and interest rates continue moving higher. Utilities have large fixed costs and high debt levels. Falling rates decrease costs and make their high dividend yields more attractive. Utilities are also defensive stocks that hold up well during periods of broad market weakness. Some of these positive factors may be changing into negatives.
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Chart 4
XLB AND XLY ARE ALREADY CHALLENGING SUMMER HIGHS... Based on the price charts, the Materials SPDR (XLB) and the Consumer Discretionary SPDR (XLY) are two of the strongest sectors. All sectors are up this week, but XLB and XLY are already challenging resistance from their summer highs. Chart 5 shows XLB breaking above its August trendline and moving above 32.5 today. While the breakout is clearly bullish, resistance from the August highs resides just below 33. Also note that XLB is up 6% in eight days and getting short-term overbought. This increases the odds for a short-term pullback or consolidation. Chart 6 shows the Consumer Discretionary SPDR (XLY) also breaking above its August trendline with a 6% surge the last four days. Even though the breakout is bullish, XLY is already at resistance from the August highs and short-term overbought.
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Chart 5
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Chart 6
SPY AND DIA HOLD WEDGE BREAKOUTS ... Stocks have been largely range bound throughout 2010. Chart 7 shows the Dow SPDR (DIA) starting the year just below 105 in January and trading near 104 this week. It appears that DIA has nothing to show for the last eight months of trading. That may be the case on paper, but the positives outweigh the negatives on the chart. Working from left to right, DIA recorded a new 52-week high with the move above 110 in April. Despite a new high, the ETF then declined and broke its February low in late June. This seemed bearish at the time, but the ETF quickly recovered and surged back above 100 to create a bear trap. A falling wedge took shape and the ETF broke above wedge resistance in July. The uptrend was in good shape until a sharp decline in August knocked the wind out of the bulls. DIA ultimately held above the June low and reversed course around 100 this week. In fact, I would now label key support at 99. Also notice that StochRSI bounced off the .50 level. Looking back, we can see that pullbacks reversed as StochRSI moved above .50 and held above .50 (green dotted lines). This gives us two levels to watch in the coming days and weeks. The bulls have the edge as long as DIA holds 99 and StochRSI holds .50. Chart 8 shows the S&P 500 ETF (SPY) with similar characteristics.
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Chart 7
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Chart 8
QQQQ AND IWM SUCCESSFULLY TEST SUPPORT ... While SPY and DIA broke below their February lows in June-July, the Nasdaq 100 ETF (QQQQ) and Russell 2000 ETF (IWM) both held support from these lows. Even though the ability to hold support showed relative strength, IWM and QQQ have both been range bound in 2010. IWM started the year around 63 and was trading near 64 on Friday. QQQQ started the year around 46 and is currently trading just above 45. Chart 9 shows QQQQ hitting a new high above 50 in April and then declining to support around 42.5 in June-July. Yes, I am ignoring the flash crash. Since this test, the ETF traced out a triangle with a lower high in early August and a higher low in late August. The boundaries of this pattern will dictate the next signal. A break above 47.5 would be bullish, while a break below 42.5 would be bearish.
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Chart 9
Chart 10 shows the Russell 2000 ETF (IWM) with a falling channel over the last four months. Even though the ETF has yet to break out of this channel, it has successfully tested support from the February-June lows with a bounce this week. In fact, notice that IWM edged higher the prior two weeks and is set for a modest gain this week. With 2010 support holding, it looks like the overall trend remains up and this channel is just a big correction. The upper trendline poses the first resistance test. The Commodity Channel Index (CCI) is shown in the indicator window. CCI formed a higher low in August and moved back above -100 this week. Momentum is improving. A break above zero would turn momentum bullish.
