JP MORGAN CHASE AND MORGAN STANLEY TURN UP -- RISING LUMBER PRICES MAY BODE WELL FOR HOUSING -- STOCK UPTREND LOOKS OVER-EXTENDED -- GOLD LEADS OVERBOUGHT COMMODITIES LOWER
TWO MORE FINANCIAL BREAKOUTS... I wrote several December messages showing upside breakouts in various financial ETFs that included banks, brokers, and insurance stocks. I also showed several stocks in those categories that were experiencing bullish breakouts. My most recent message a couple of weeks ago showed two financial stocks that hadn't broken out yet, but that appeared to be on the verge of doing so. Since then, both have turned up. Chart 1 shows JP Morgan Chase breaking through its summer highs to reach an eight month high. Its relative strength line (below chart) has started rising as well. Chart 2 shows Morgan Stanley achieving a bullish breakout as well. Financials were the market's strongest sector during December and, in my opinion, represent one of the best values in the market for 2011.
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Chart 1
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Chart 2
RISING LUMBER PRICE MAY BODE WELL FOR HOUSING... Housing stocks were another group that we showed turning up during December. Chart 3 shows the DJ US Home Construction iShares (ITB) rising to the highest level since the spring. Homebuilders were also one of December's strongest groups as shown by the rising relative strength line below Chart 3. I often look to commodity markets to help determine the potential strength of various stock groups. Copper, for example, recently hit a new record high which bodes well for the global economy and stocks (not to mention stocks tied to that commodity). One of the lesser followed commodities -- lumber -- has some bearing on the construction industry and homebuilders in particular. Chart 3 shows the price of lumber (brown line) surging to the highest level since April. Lumber usually has a positive correlation to the trend of housing stocks. The fact that lumber is trending higher may be a sign that housing stocks (and construction in general) are in for a better year. That positive view is strengthened by yesterday's report that construction spending for November reached a five-month high.
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Chart 3
STOCK UPTREND LOOKS OVER-EXTENDED... Arthur Hill's message yesterday showed excessive bullishness in stock sentiment indicators. The next two charts also show an overbought reading in the S&P 500. The weekly bars in Chart 4 show the market trading at the highest level in more than two years and in a clear uptrend. Chart 4 also shows, however, that the S&P has entered a potential resistance zone marked by the early 2008 low near 1270 up to the summer high near 1300 (see lines). The S&P 500 has also retraced two-thirds of the 2007/2009 decline which often acts as a resistance level. More importantly, the 14-week RSI line (top of Chart 4) has reached the overbought 70 level for the first time since April. If nothing else, that may be a warning that the market rally has reached a point where it's in need of a pullback or consolidation. The daily indicators in Chart 5 paint a similar picture. The 14-day RSI line (top of chart) is pulling back from overbought territory over 70 and forming a slight "negative divergence" from its early November peak. That's usually indicative of a "short-term" pullback in price. If a pullback were to occur, chart support is likely at 1225 which is the November price peak (a drop of 4%). The blue 50-day average (currently at 1219) should act as support as well. [Major chart support should reside along the spring high near 1220]. Any pullback would be viewed as a normal correction in an ongoing bull market.
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Chart 4
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Chart 5
PROFIT-TAKING IN GOLD ... Since stocks and commodities have been rising together, it's not surprising to see both become overbought together as well. That may explain why most commodities are coming under selling pressure today. Gold is experiencing especially heavy selling. Chart 6 shows the Gold Trust Shares (GLD) falling 2.5% today and threatening its blue 50-day average. The chart pattern since early November has the look of a potential "triple top" which would imply a downside correction. Today's downside volume has also picked up noticeably. Lower RSI values since October also show loss of upside momentum. Gold stocks are doing even worse. Chart 7 shows the Market Vectors Gold Miners ETF (GDX) having already fallen below its 50-day line. Its RSI line is slipping below 50 which also implies a downside correction. The chart suggest that this may not be the best time to be committing new money to gold or gold stocks. A better buying opportunity may present itself at lower levels. The same may be true of most commodities and stocks.
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Chart 6
