PUT/CALL RATIO DOES A DOUBLE DIP -- MACD(10,50,10) REMAINS POSITIVE FOR THE S&P 500 -- TECHNOLOGY SPDR LEADS SECTORS IN 2011 -- RAILROADS AND AIRLINES LIFT TRANSPORTS -- NIKKEI SURGES ABOVE DECEMBER HIGH
PUT/CALL RATIO DOES A ANOTHER DOUBLE DIP... Link for todays video. Those who have spent a few springs in tornado alley know that there is a difference between a tornado watch and a tornado warning. A tornado watch means conditions are ripe for a tornado, but a tornado does not always form. A tornado warnings means there is an actual tornado. Take cover. This watch versus warning analogy can be extended to the stock market. With stocks overbought and many sentiment indicators at extremes, a correction watch should be issued. I wrote about excessive bullishness in AAII sentiment and the Put/Call ratio on Monday, while John Murphy showed the CBOE Volatility Index ($VIX) at long-term support on Thursday. Chart 1 shows the 5-day EMA for the CBOE Total Put/Call Ratio ($CPC) dipping below .75 for the second time in two months. This double dip looks similar to the double dips seen a year ago and in April. These dips below .75 show relatively high call volume relative to put volume. Calls options make money when the market goes up and represent a bullish bet. Relative high call volume suggests excessive bullishness among options players. A surge back above .75 would trigger the earliest possible bearish signal here.
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Chart 1
MACD(10,50,10) REMAINS POSITIVE FOR THE S&P 500 ... While overbought/oversold conditions, put/call ratios, volatility indices and sentiment surveys are WATCH type indicators, price provides the true warnings or signals. As Lord John Maynard Keynes said: Markets can remain irrational longer than you can remain solvent. Now, I am not saying the stock market is irrational. Stocks are strong for a reason (earnings, economy, liquidity, yield curve, fiscal stimulus, etc...). Sometimes these reasons are not apparent at the time of the advance. It is, however, apparent that there is simply no evidence of selling pressure on the price chart. Chart 2 shows the S&P 500 over the last 13 months. The short green lines mark short-term support levels in January 2010, April 2010 and January 2011. These dates correspond to the double dips in the CBOE Total Put/Call Ratio. At the very least, a support break is required to show some selling pressure that could warn of a correction. The top indicator window shows the MACD-Histogram (10,50,10). MACD(10,50,10) remains above its signal line as long as the histogram is positive. A move into negative territory would reflect a signal line crossover. The bottom indicator window shows MACD(10,50,10) for reference.
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Chart 2
TECHNOLOGY SPDR LEADS SECTORS IN 2011... Even though 2011 has just begun, the technology sector is getting off to a great start. PerfChart 3 shows the nine sector SPDRs and the S&P 500. The black dotted line marks the performance for the S&P 500 at 1.29%. Sectors extending above this line are outperforming. Those falling short are underperforming. Technology, healthcare and finance are outperforming so far in 2011. Consumer discretionary, industrials and utilities are up for the year, but underperforming the S&P 500. While it is quite positive to see relative strength in technology, it is negative to see relative weakness in the consumer discretionary sector, which is dominated by retailers. Charting Note: users can change the time scale by clicking the right mouse button and choosing a preset selection. The icons on the bottom left can be used to change the PerfChart from line to histogram format.
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Chart 3
A look at the top 10 components for the Technology ETF (XLK) shows Apple (AAPL), Microsoft (MSFT), Google (GOOG), Cisco (CSCO), Verizon (VZ) and QualComm (QCOM) up more than the S&P 500 (black dotted line). Except for Verizon, all are up more than XLK as well. These are the early leaders in 2011. On the negative side, Intel (INTC) is showing both relative weakness and absolute weakness with a 1.24% year-to-date decline. The Semiconductor HOLDRS (SMH) is also underperforming with a 1.11% gain year-to-date. Click here for a CandleGlance chart showing these 10 stocks.
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Chart 4
RAILROADS AND AIRLINES LIFT TRANSPORTS... Strength in railroad and airline stocks pushed the Dow Transports to a new 52-week high this week. Chart 5 shows the Dow Transports surging in early September and then working its way higher the last four months. There was also a surge in early December and then a grind higher the last five weeks. This grind higher is a common pattern/picture right now. The Average is overbought and ripe for a pullback, but there are simply no signs of selling pressure. First support is marked at 5000. Chart 6 shows the DJ US Railroad Index ($DJUSRR) exceeding its December high today and recording a new 52-week high. Chart 7 shows the DJ US Airline Index ($DJUSAR) finding support at broken resistance around 82 and surging off support the last five days. This index is up over 5% in January and one of the market leaders.
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Chart 5
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Chart 6
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Chart 7
NIKKEI SURGES ABOVE DECEMBER HIGH... The Nikkei 225 ($NIKK) continued strong in 2011 with a surge above 10,400 and a seven month high. Chart 8 shows the Nikkei stalling in the 10200-10400 area during December and breaking free this month. The Nikkei is one of the strongest equity indices in the world right now. The indicator window shows the Shanghai Composite in red and the Nikkei in black. The Shanghai Composite peaked in early November, but the Nikkei continued higher and shows relative strength since early September. Some of the Nikkei strength can be attributed to weakness in the Yen. Chart 9 shows the Yen ETF (FXY) forming a lower high and moving sharply lower the last five days. The ETF has yet to break support at 117 though. A break here would be quite positive for Japanese exporters and could provide another boost for the Nikkei.
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Chart 8
