SEMIS CONTINUE TO LAG BROADER MARKET -- DOLLAR AND GOLD DECOUPLE AS DOLLAR PLUNGES -- DOLLAR MOVES TO OVERSOLD LEVELS WITH SHARP DECLINE -- OIL WEAKENS EVEN AS DOLLAR FALLS -- LONG BOND ETF BREAKS SHORT-TERM RESISTANCE
SEMIS CONTINUE TO LAG BROADER MARKET... Link for todays video. The Semiconductor HOLDRS (SMH) stands out as a clear laggard over the last few months. Most broad market indices moved above their summer highs, but SMH did not even come close. In addition, note that the Networking iShares (IGN), the Software HOLDRS (SWH) and the Internet FirstTrust ETF (FDN) exceeded their summer highs as well. Even though three of the four key tech sectors are showing relative strength, relative weakness in Semis remains a concern for the overall market. Chart 1 shows SMH moving higher with the rest of the market in September, but only retracing 62% of the prior decline. Also notice that SMH met resistance near broken support around 27. This resistance level was outlined in a market message last week and it is holding. The September advance looks like a rising wedge that is still rising. Typically, these are corrective patterns. A move below the lower trendline would be the first sign of weakness that could signal a continuation of the August decline. Chart 2 shows weekly prices with a falling channel since April. SMH forged lower lows and lower highs the last six months. At the very least, a break above the upper trendline is needed to get the bulls back on track. Momentum is bearish as weekly MACD remains below its signal line and in negative territory.
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Chart 1
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Chart 2
DOLLAR AND GOLD DECOUPLE AS DOLLAR PLUNGES... The Dollar and gold were positively correlated throughout much of 2010, but decoupled as the Dollar fell off a cliff the last few weeks. Chart 3 shows the US Dollar Fund (UUP) and the Gold SPDR (GLD) rising in April-May, falling in July, rising in August and then going their separate ways in September. Gold seems to benefit no matter which currency is in crisis mode. Gold rallied when during the April-May Euro crisis and is now surging during the September Dollar crisis. Unlike central bankers, gold does not like slow steady currency moves. Instead, gold thrives on sharp crisis like moves. This means gold could continue higher as the currency crises swing from the Euro to the Dollar and back again.
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Chart 3
Chart 4 shows the Gold SPDR surging over 11% in less than 2 months. GLD broke above its summer highs in the meantime. Broken resistance and the early September consolidation combine to mark the first support zone to watch on any pullback.
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Chart 4
DOLLAR MOVES TO OVERSOLD LEVELS WITH SHARP DECLINE... With a 4.6% decline the last 4-5 weeks, the US Dollar Fund (UUP) moved to new lows and became oversold. Chart 5 shows the US Dollar Fund (UUP) hitting resistance around 24.25 and falling off a cliff the last few weeks. Resistance in the 24.25 area stems from the 150-day moving average. Technically, RSI became oversold with a move below 30 today. However, oversold is not necessarily bullish. Notice that the ETF became oversold in mid July and remained oversold until early August as it moved to new lows. More importantly, RSI remains in bear mode as it ranges from 20 to 60. This key momentum indicator broke bull range support with the move below 40 in late June (red arrow). RSI then hit resistance in the 50-60 zone as the ETF hit resistance the last three weeks of August. 20-60 is now the bear market range for RSI. A break above 60 is needed to shift momentum back to the bulls. Chart 6 shows the Euro Currency Trust (FXE) moving opposite the Dollar. Even though the two week surge favors the risk-on trade, the sharpness of the Dollars decline is cause for re-consideration.
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Chart 5
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Chart 6
OIL WEAKENS EVEN AS DOLLAR FALLS... Last week I wrote about September weakness in oil despite strength in the stock market. Even with a sharp decline in the Dollar the last eight days, oil remains under pressure and relatively week. Because oil is denominated in Dollars, weakness in the Dollar is viewed as bullish for the commodity. However, it appears that oil is getting a mind of its own lately. Chart 7 shows the USO Oil Fund (USO) breaking below wedge support with a decline the last five days. There was a small bounce on Monday and this high becomes the first resistance level to watch. A bounce in the stock market and move above 33.5 would be positive for oil. The outlook is bearish as long as this wedge break holds. Chart 8 shows the US Gasoline Fund (UGA) with a similar pattern and short-term resistance at 33.
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Chart 7
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Chart 8
LONG BOND ETF BREAKS SHORT-TERM RESISTANCE... With the Fed signaling caution on the economy and the possibility of a second round of quantitative easing (QE2), money moved into bonds and pushed the 20+ year Bond ETF (TLT) sharply higher. Chart 9 shows TLT moving back to broken resistance in mid September with a 62% retracement of the prior advance (late July to late August). This decline also formed a falling flag. With the long-term trend clearly up for bonds, this pullback should be viewed as a correction within a bigger uptrend. Support from broken resistance ultimately held as TLT broke above 104 with a surge over the last four days. Needless to say, a short-term breakout in a long-term uptrend is bullish.
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Chart 9
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Chart 10
A renewed uptrend in bonds is potentially bearish for stocks. First, stocks and bonds have been negatively correlated throughout 2010. Bonds surged in August as stocks moved lower. The September surge in stocks was also accompanied by a decline in bonds. Second, a rise in bonds points to weakness in the economy, which is negative for stocks. The Fed would not be considering QE2 if things were hunky-dory. QE2 is really a double-edged sword for the stock market. More easing is positive for stocks, but the rationale behind the decision is negative for stocks.
SHORT-TERM INTEREST RATES HIT NEW LOWS... With the Fed reiterating its policy of low interest rates for an extended period of time, short-term rates moved to new lows as money moved into 2-year and 5-year Treasuries. Chart 11 shows the 2-Year Treasury Yield ($UST2Y) moving below its August low. As far as I can tell, this is an all time low. This is an end-of-day (EOD) chart so todays date is not yet shown. Chart 12 shows the 5-Year Treasury Yield ($FVX) also moving to new lows over the last two days. Short-term yields were moving higher in early September, but the bounce got derailed over the last two weeks. The continuation of the six month downtrend could be bearish for stocks. Notice how the 5-Year Treasury Yield peaked ahead of stocks in early April and moved sharply lower in May and June along with stocks. One must wonder why money continues moving into such low yielding short-term treasuries.
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Chart 11
