BONDS YIELDS SURGE AS UNEMPLOYMENT FALLS -- FINANCE SECTOR REMAINS THE MAIN DRAG -- TECHNOLOGY AND CONSUMER DISCRETIONARY SPDRS NEAR 2007 HIGHS -- FINANCE SECTOR CONSOLIDATES NEAR RESISTANCE -- NDX AND SPX %ABOVE 50-DAY REMAINS BULLISH
BONDS YIELDS SURGE AS UNEMPLOYMENT RATE FALLS... Even though non-farm payrolls rose by a paltry 36,000 in January, the unemployment rate fell to 9%. Anomalies and statistical errors aside, bonds took the news rather hard. Bonds fell and rates rose because a decline in the unemployment rate increases the chances of a policy change at the Fed. Stocks have been strong for almost two years now, which jibes with an economic recovery that is well under way. Commodities are also rising as demand strengthens. Employment is one of the last puzzle pieces for a recovery and for a Fed policy change. Moreover, bond yields typically lead the Fed, just like the stock market typically leads the economy. Chart 1 shows the 7-10 year Bond ETF (IEF) moving lower every day this week. The ETF broke below wedge support over the last few days to signal a continuation of the bigger downtrend. The January highs now become key resistance for this downtrend. Chart 2 shows the 10-year Treasury Yield ($TNX) breaking triangle resistance with a big surge this week. The next resistance zone resides around 4%. Bonds yields have been rising for around 4 months now, clearly trying to tell us something regarding Fed policy.
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
FINANCE SECTOR REMAINS THE MAIN DRAG ON THE S&P 500 ... Of the nine S&P Sector SPDRs, the Finance SPDR (XLF) remains the furthest from its October 2007 levels by far. We can get an idea of performance since October 2007 using a PerfChart. The S&P 500 peaked on October 9th and the Sector PerfChart extends back to October 11, 2007. This covers the decline to the March 2009 low and the advance to the current high. Admittedly, not all sectors peaked in October 2007 though. The Basic Materials SPDR (XLB) and Energy SPDR (XLE) peaked in May 2008, some seven months after the S&P 500. The Finance SPDR (XLF) and the Consumer Discretionary SPDR (XLY) peaked in June 2007, four months ahead of the broader market. Months of relative weakness in both XLY and XLF preceded a major peak. But I digress. Looking at current performance since October 2007, we can clearly see that the finance sector remains the big laggard (-49%). This has been and remains a major drag on the S&P 500. Utilities are also significantly below their October 2007 levels. The other sectors are either down a little or up a little relative to their October 2007 levels. According to this performance table, finance still has a lot of catching up to do.
(click to view a live version of this chart)
Chart 3
(click to view a live version of this chart)
Chart 4
TECHNOLOGY AND CONSUMER DISCRETIONARY SPDRS NEAR 2007 HIGHS... Of the nine sector SPDRs, only the Consumer Staples SPDR (XLP) has exceeded its 2007-2008 highs. Chart 5 shows XLP breaking resistance in September 2010 and forging a multi-year high a few months later. The Technology ETF (XLK) and the Consumer Discretionary SPDR (XLY) are currently closing in on their 2007 highs. Chart 6 shows XLK hitting a new 52-week high this week and within a few percentage points of the October 2007 high. Chart 7 shows XLY within spitting distance of its 2007 high.
(click to view a live version of this chart)
Chart 5
(click to view a live version of this chart)
Chart 6
(click to view a live version of this chart)
Chart 7
FINANCE SECTOR CONSOLIDATES WITHIN BIGGER UPTREND... Even though the finance sector is clearly the big laggard since October 2007, it is currently in bull mode and challenging resistance from the April high. Chart 6 shows XLF surging above 14 in August 2009 and then embarking on a long consolidation. Support around 13.50 held from August 2008 until September 2010. The rally over the last five months carried the ETF to resistance. The indicator window shows RSI within its bull zone (40-80). Despite some summer weakness, RSI ultimately held its bull zone and momentum still favors the bulls.
(click to view a live version of this chart)
Chart 8
Turning to the daily chart, we can magnify price action at this resistance zone. Chart 9 shows XLF consolidating the last 3-4 weeks with support at 16.2 and resistance at 16.8. A break of these levels will provide the next directional clue. A break above resistance signals a continuation higher and would lead to a 52-week high for this key sector SPDR. Failure here and a break below support would argue for a deeper pullback.
(click to view a live version of this chart)
Chart 9
PERCENT OF $NDX AND $SPX STOCKS ABOVE 50-DAY REMAINS BULLISH... The Nasdaq 100 %Above 50-day SMA ($NDXA50R) and the S&P 500 %Above 50-day SMA ($SPXA50R) are two breadth indicator designed to measure the degree of participation. In this instance, the indicator tells us the percentage of stocks in each index that are above their 50-day SMAs. In general, a bullish bias exists when more than 50% are above their 50-day SMAs and a bearish bias otherwise (<50%). Using the 50% line to signal shifts can result in whipsaws so I applied a filter. The bullish threshold is set just above 50% (55%) and the bearish threshold is set just below (45%). This reduces the number signals and whipsaws.
Chart 10 shows the Nasdaq 100 %Above 50-day SMA well above 50% (currently 70%). Fewer stocks are above their 50-day SMA now than in October or early January. In fact, there is even a bearish divergence extending from the October high to the January high. While the Nasdaq 100 moved to a new high in January, fewer stocks made it above their 50-day SMAs at this time. Despite some evidence of narrowing participation, plenty of stocks are still participating to keep the indicator above 50%.
(click to view a live version of this chart)
Chart 10
Chart 11 shows the S&P 500 %Above 50-day SMA with similar characteristics. A bearish divergence formed from October to January as participation narrowed. The S&P 500 hit a new 52-week high this week and 75.8% of its components are above their 50-day SMA. This is much less than mid October and early January, but 75% is more than enough to power a rally. The bearish divergence simply shows less strength. We have yet to see actual weakness and will not see it until the indicator moves below 45%.
