RETAIL AND SEMIS MOVE FROM LEADERS TO LAGGARDS -- SMH CONSOLIDATES AT HIGH LEVELS -- INTEREST RATES PRICE IN A FED POLICY CHANGE -- BONDS ETFS FORM BEARISH CONSOLIDATION PATTERNS -- DOLLAR BOUNCES OFF SUPPORT WITH BULL FLAG
RETAIL AND SEMIS MOVE FROM LEADERS TO LAGGARDS... Link for todays video. Even though the major indices remain in clear uptrends, relative weakness in some key groups suggests that a little caution is warranted. The perfcharts below show the S&P 500 with nine industry group ETFs. The first chart shows performance from 30-Aug to 30-Nov. The second chart shows performance from 1-Dec to 4-Jan. There is a clear shift as some key groups moved from leaders to laggards from the first period to the second period. The S&P 500 advanced over 12% from September to November and seven of the nine industry group ETF outperformed the S&P 500. The Homebuilders SPDR (XHB) and the Regional Bank SPDR (KRE) lagged with smaller gains. Relative strength from the Semiconductor HOLDRS (SMH), Retail SPDR (XRT) and Internet FirstTrust ETF (FDN) reflected a healthy appetite for risk during this period. These three were up more than twice the amount of the S&P 500.
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Chart 1
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Chart 2
The S&P 500 is up over 5% since early December. While all ten industry group ETFs show gains for this period as well, five are lagging the S&P 500 with smaller gains. These are the Transport iShares (IYT), the Semiconductor HOLDRS (SMH), the Oil Service HOLDRS (OIH), the Internet FirstTrust ETF (FDN) and the Retail SPDR (XRT). In particular, the Retail SPDR is seriously underperforming the S&P 500 over the last five weeks. The Semiconductor HOLDRS is up around half the amount of the S&P 500 and the Internet FirstTrust ETF is up just over 2%. Relative weakness reflects a diminished appetite for risk and this could foreshadow a correction in the coming weeks.
SMH CONSOLIDATES AT HIGH LEVELS... Lets look at the individual charts. Chart 3 shows the Semiconductor HOLDRS (SMH) surging over 30% from late August to early December. Since moving above 33, the ETF has consolidated with a pennant taking shape. Technically, these are continuation patterns that represent a rest in the ongoing trend. A break above 33 would signal a continuation higher and open the door to a new 52-week high. A break below pennant support at 32 would be short-term bearish and signal the start of a correction within the bigger uptrend. Broken resistance turns into support around 30. The price relative in the indicator window shows SMH lagging SPY since early December.
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Chart 3
Chart 4 shows the Retail SPDR (XRT) breaking above its April high and holding this breakout. The going has gotten tougher since early December as the ETF started lagging SPY. Notice that the price relative peaked in late November. Broken resistance around 45 turns into the first support level to watch on a pullback.
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Chart 4
INTEREST RATES PRICE IN A FED POLICY CHANGE... This is a big week for the bond market. Even though the economy and stock market are strong, employment growth has been lagging and the unemployment rate remains high. Remember, the Fed has a dual mandate: full employment and price stability. Inflation is currently under control, but the US remains well short of full employment. To be fair, the employment rate is a lagging indicator and job growth does not pick up until well into a recovery. Well, the recovery officially began in the third quarter of 2009, over a year ago. While I am not about to make a prediction on Fridays employment report, I would hazard a guess that a better-than-expected report would send bonds sharply lower because this would push the Fed closer to a policy change. We got a preview with todays better-than-expected ADP report.
The bond market is already pricing in some sort of change in 2011. Chart 5 shows the 10-year Treasury Yield ($TNX) breaking resistance in November and moving above 3.5% in December. $TNX consolidated with a pennant over the last few weeks. These are continuation patterns. A break above pennant resistance would signal a continuation higher and target a move to the next resistance zone around 4% (40 on the chart). Looks like a breakout is in the making today. The indicator window shows the 10-year Treasury Yield (black) along with the CRB Index ($CRB). Notice that the CRB bottomed in late May and moved higher the last six months. Such strength in commodity prices would lead to inflation down the road. In addition to employment growth, the bond market may also have an eye on the inflation prospects for 2011.
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Chart 5
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Chart 6
BONDS ETFS FORM BEARISH CONTINUATION PATTERNS... The 7-10 year Bond ETF (IEF) and the 20+ year Bond ETF (TLT) are the two most popular bond ETFs. Bonds move opposite of interest rates so we can expect bonds to move lower when interest rates move higher. The 7-10 year Bond ETF corresponds best to the 10-year Treasury Yield, while the 20+ year Bond ETF matches up best with the 30-year Treasury Yield. Chart 7 shows the 7-10 year Bond ETF breaking down in November and declining sharply in December. An oversold bounce over the last few weeks formed a small rising wedge. The prior move was down and this makes the consolidation a bearish continuation pattern. A break below wedge support would argue for another leg lower with the next target around 88 (broken resistance). Chart 8 shows the 20+ year Bond ETF (TLT) within a falling price channel. The ETF hit resistance from the upper trendline as a rising flag formed the last few weeks. These are bearish continuation patterns. A break below flag support would argue for a move to the next support zone around 88-89.
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Chart 7
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Chart 8
DOLLAR BOUNCES OFF SUPPORT WITH BULL FLAG ... The US Dollar is benefitting from strength in the economy and rising rates. As noted above, a better-than-expected employment report would likely weigh on bonds and lift interest rates. Todays ADP employment report showed a sharp increase in December private-sector employment. This news weighed on bonds and lifted the Dollar. Chart 9 shows the US Dollar Fund (UUP) with a falling flag during December. Notice that the flag found support near the 50% retracement mark and broken resistance (22.75). Todays big move reinforces support here. A follow through breakout would signal a continuation of the November advance and target a move to the next resistance zone around 24.25. The indicator window shows the US Dollar Fund with the 1-Year Treasury Yield ($UST1Y). The yield peaked ahead of the Dollar in April and bottomed ahead of the Dollar in October. Rising rates make Dollar denominated bonds more attractive.
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Chart 9
Chart 10 shows the Euro Currency Trust (FXE) breaking support with a sharp decline in November. Broken support and the December highs mark resistance at 134. Todays sharp decline reinforces this resistance level. Also notice that RSI hit resistance in the 50-60 zone. First, the indicator became oversold in late November. While oversold conditions can give way to a bounce, they are usually part of a bigger downtrend. Second, expect RSI to hit resistance in the 50-60 zone when the bigger trend is down. The failure in the 50-60 zone affirms the bigger downtrend for the Euro. 14-period RSI also works pretty well on the weekly charts. Keep in mind that indicators are not perfect. RSI, and other indicators, should be used in conjunction with other analysis techniques.
