BONDS PLUNGE AFTER FED STATEMENT RATES CHALLENGE RESISTANCE -- RUSSELL 2000 ETF ESTABLISHES SUPPORT -- MOMENTUM REMAINS BULLISH FOR MATERIALS SECTOR -- MEASURING SECTOR RELATIVE PERFORMANCE WITH PERFCHARTS -- XLY HOLDS SUPPORT AND RECORDS 52-WEEK HIGH
BONDS PLUNGE AFTER FED STATEMENT... Link for todays video. Todays Fed policy statement offered few surprises as policy makers elected to keep the Fed Funds target unchanged (0-.25%) and continue its plan to purchase some $600 billion of US Treasuries. This program is slated to extend into June, but the bond market may be looking past June. Bonds started the day weak and moved lower after the Fed announcement. Chart 1 shows the 7-10 year Bond ETF (IEF) with a rising wedge evolving over the last five weeks. Technically, the 5-week trend is up as long as the wedge rises and support from the late January low holds. A break below this low would signal a continuation lower. Chart 2 shows the 20+ year Bond ETF (TLT) within a clear downtrend since September. The ETF broke flag support in early January and the next support zone is around 88-89. Notice how the long-term bond ETF (20+ Year Bonds) is weaker than the medium-term bond ETF (7-10 Year Bonds). Longer bonds are more sensitive to changes in interest rate policy or events that might put downward pressure on bonds (like inflation).
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Chart 1
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Chart 2
LONG-TERM INTEREST RATES CHALLENGE RESISTANCE... Weakness in bonds translates into strength in interest rates as yields rise when bonds fall. Chart 3 shows the 10-year Treasury Yield ($TNX) with a triangle formation over the last five weeks. The prior move was up and the current move is flat. This looks like a consolidation within a bigger uptrend. A break above 35 (3.5%) would be bullish and open the door to even higher yields (lower bond prices). Chart 4 shows the 30-year Treasury Yield ($TYX) surging towards resistance from the December-January highs.
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Chart 3
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Chart 4
RUSSELL 2000 ETF ESTABLISHES SUPPORT WITH BIG BOUNCE ... After lagging for a few weeks, the Basic Materials SPDR (+2.12%) and the Russell 2000 ETF (+1.59%) returned to favor with big gains on Wednesday. The energy sector was also strong as oil broke a six day losing streak. Despite gains in these three areas, the rest of the market was rather mixed. The S&P 500 ETF (+.39%) and Nasdaq 100 ETF (+.53%) posted relatively modest gains, while the Consumer Discretionary SPDR (+.16%) and the Finance SPDR (-.09%) were pretty much unchanged on the day. Todays big gains in Basic Materials SPDR and the Russell 2000 ETF established important support levels to watch going forward. Chart 5 shows the Russell 2000 ETF bouncing off the 77-78 area for the second time this year. This area also acted as support the first week of January. A move below the January lows would break support and argue for retracement of the August-January advance.
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Chart 5
MOMENTUM REMAINS BULLISH FOR MATERIALS SECTOR... Chart 6 shows the Basic Materials SPDR taking a big hit last week and then recouping most of that loss with todays gain. This move establishes support in the 37-38 area. A move below the January lows would break first support and argue for a retracement of the July-January advance. The prior advance tacked on over 40% in six months. The indicator window shows MACD. This classic momentum oscillator moved into positive territory in early September and remained positive for over four months. While there have been some ups and downs the last four months, momentum generally favors the bulls when MACD is in positive territory.
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Chart 6
MEASURING SECTOR RELATIVE PERFORMANCE WITH PERFCHARTS... I have been writing about relative weakness in the Consumer Discretionary SPDR (XLY), but this ETF has yet to show any absolute weakness. What is relative weakness and why does it matter? Relative performance is one of those forecast type indicators or analysis techniques. Consumer discretionary is an important sector because it is the most economically sensitive sector. Retailers feature prominently, which makes this sector somewhat of a litmus test for consumer spending. Relative strength (outperformance) in the consumer discretionary is seen as market bullish, while relative weakness (underperformance) is viewed as market bearish. Relative weakness, however, is not the same as absolute weakness, which requires actual selling pressure and a price decline.
There are many ways to measure relative strength or weakness. Here are three examples. First, we can look at a Sector PerfChart to compare the relative gain/loss in each sector. Chart 7 shows the Sector PerfChart with the absolute percentage change from November 30th until January 25th. All sectors and the S&P 500 are up and up over 5% in less than two months. Some sectors are up more than the benchmark (relative strength), while some are up less (relative weakness).
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Chart 7
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Chart 8
Second, we can look at relative percentage change. Chart 8 shows a relative strength PerfChart, which shows difference between the sector gain and the S&P 500 gain since November 30th. Notice that the tab for the S&P 500 is shaded gray (upper left corner). This makes it the benchmark. Chartists can click on another tab to change the benchmark. The histogram bars show the percentage change for each sector relative to the S&P 500. The S&P 500 is up 9.37% and the Energy SPDR (XLE) is up 12.37%, which means XLE shows relative strength (12.37 9.37 = +3.00). XLE is up more than the S&P 500 and has a positive relative performance. Sectors with negative relative performance are up less than the S&P 500. The S&P 500 is up 9.37% and the Consumer Discretionary SPDR (XLY) is up 5.71%, which means XLY shows relative weakness because it is up less than the S&P 500 (9.37 5.71 = -3.66).
XLY HOLDS SUPPORT AND RECORDS 52-WEEK HIGH... The third method is with the Price Relative, which is a ratio plot of two securities. A ratio plot of the Consumer Discretionary SPDR and S&P 500 (XLY:$SPX) shows when the sector is outperforming and when it is underperforming. The ratio rises when XLY shows relative strength and declines when XLY shows relative weakness. Chart 9 shows XLY with the Price Relative in the indicator window. Even though XLY continues to edge higher and remains above support, it has been underperforming the S&P 500 since early December. This is a warning sign, but a support break is needed to show actual selling pressure. As the price chart currently stands, there is simply now evidence of material selling pressure. There may be less buying pressure, but there is simply no selling pressure. This why chartists should not rely on one indicator and should pay close attention to the basic trend on the price chart.
