DOW INDUSTRIALS AND TRANSPORTS EXCEED FEBRUARY HIGHS -- FINANCE SECTOR PERKS UP WITH A BREAKOUT -- GOLDMAN, STATE STREET AND HUNTINGTON CATCH A BID -- SHORT-TERM RATES HOLD SUPPORT AND MOVE HIGHER -- DOLLAR BOUNCES ALONG WITH INTEREST RATES
DOW INDUSTRIALS AND TRANSPORTS EXCEED FEBRUARY HIGHS... Link for todays video. With the surge over the last two weeks, the Dow Industrials moved back above its February high to record a new 52-week high on Friday. Chart 1 shows the mid March reversal around 11600 establishing a key reaction low upon which to base major support. Failure to hold the break above the February high and a move lower would raise the prospect of a double top, but that is really just a red herring at this point. There is also a rising channel taking shape with both trendlines being touched twice. A move towards the upper trendline would target further strength well above 13000. The indicator window shows MACD(5,35,5) dipping into negative territory and moving above its signal line for the third time in eight months (green arrows). The last two rallies pushed MACD(5,35,5) above 300. This means that the 5-day EMA exceeded the 35-day EMA by more than 300 points.
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Chart 1
Chart 2 shows the Dow Transports surging around 10% the last 2-3 weeks and clearing its February high today. Admittedly, the pattern in 2011 could evolve into a rare broadening formation. Notice the lower lows in January-March, the higher highs in January-February and higher high early this month. Regardless of the pattern, the trend is clearly up with the Average trading at a 52-week high today. The indicator window shows the Price Relative comparing the performance of Dow Transports to the Dow Industrials. The Transports outperformed from late August to January and underperformed from mid January to early March. Despite oil trading above $105, the Price Relative broke the January trendline with an advance the last few weeks and the Transports are showing relative strength recently. Dow Theory also remains in bull mode with both key Averages near 52-week highs.
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Chart 2
FINANCE SECTOR PERKS UP WITH A BREAKOUT... The Finance SPDR (XLF) sprang to life as the Nasdaq OMX ($NDAQ) came to the rescue of the NYSE Euronext (NYX). The Nasdaq trumped the Deutsche Boerse with a $11.3 billion bid for the NYSE Euronext. NYX stock surged over 10% and contributed to the gains in the Finance SPDR. Chart 3 shows XLF breaking above channel support with an advance above 16.5 this week. The overall trend here is clearly up and this breakout signals a continuation of that uptrend. There is still some concern because XLF remains relatively weak. The Price Relative peaked in mid January and remains in a downtrend. A breakout here is needed for XLF to show some relative strength.
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Chart 3
GOLDMAN, STATE STREET AND HUNTINGTON CATCH A BID... Chart 4 shows Goldman Sachs (GS) hitting support from broken resistance and a key retracement zone in March. The stock also formed a falling wedge over the last few months and is on the verge of breaking wedge resistance. A breakout in this investment banking behemoth would be positive for the finance sector. Chart 5 shows State Street (STT) bouncing off support from the November low and breaking wedge resistance this week. Chart 6 shows Huntington Bancshares (HBAN) finding support near broken resistance levels and the 62% retracement. After firming throughout March, the stock broke above resistance with a surge early Friday.
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Chart 4
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Chart 5
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Chart 6
SHORT-TERM RATES HOLD SUPPORT AND MOVE HIGHER... As John Murphy noted earlier today, the March jobs report was strong with a big increase in non-farm payrolls. Bonds were under pressure in early trading and this means interest rates were on the rise. Chart 7 shows the 5-yr Treasury Yield ($FVX) surging in November-December and then moving into a consolidation pattern. The yield established support in the 18-19 area (1.8% to 1.9%) with lows in January and March. These lows hold the key to the current uptrend in rates. Rising rates via the Treasury market mean that the next move from the Fed will be to tighten (raise rates) . Todays jobs report puts more pressure on the Fed. According to the Wall Street Journal, Fed Fund futures are pricing in a 96% chance that the Fed will raise the Fed Funds rate at its January 2012 meeting. This hike could come even sooner as Fed Fund futures price in a 26% chance of a rate hike at the November meeting.
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Chart 7
DOLLAR BOUNCES ALONG WITH INTEREST RATES... The strong jobs report and surge in short-term rates, put a bid into the oversold Dollar. Among other things, the different policy stances of the Fed and European Central Bank (ECB) contributed to Dollar weakness and Euro strength over the last few months. In contrast to the Fed, the ECB has a single mandate of price stability and has been threatening to raise rates. Higher interest rates make Euro denominated debt more attractive for its higher yield. The Fed, on the other hand, has a dual mandate (price stability and employment growth). With the second strong jobs report in two months, employment growth appears to be picking up and this could lead to a more hawkish Fed. Chart 8 shows the US Dollar Fund (UUP) recording a 52-week low in late March. The overall trend is clearly down, but an oversold bounce cannot be ruled out. Based on broken supports, the June trendline and the February high, I am marking a resistance zone from 22.25 to 22.60.
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Chart 8
The indicator window shows the Dollar along with the 1-Year Treasury Yield ($UST1Y). Both declined from June to October, rose in November-December and then declined into March. There appears to be a positive relationship between these two. Notice that the 1-Year Treasury Yield surged over the last two weeks and is poised to break its 2011 highs. This could be a positive development for the Dollar.
ZWEIG BREADTH THRUST INDICATOR SURGES TOWARDS BULLISH THRESHOLD... Developed by Martin Zweig, the Breadth Thrust indicator is designed to identify strong buying surges that can foreshadow further gains in the coming months. The indicator is quite straight-forward in its calculation. Breadth Thrust is the 10-day EMA of NYSE Advances divided by NYSE Advances plus NYSE Declines. I have not seen an exact date, but I would guess that Zweig developed this indicator in the late 70s or early 80s. Stocks traded with fractions (1/8) back then and there were often a larger number of unchanged issues. The number of unchanged issues dropped over the years and relatively few stocks are unchanged since the advent of decimalization in 2001. With this in mind, it is possible to re-create the Breadth Thrust indicator using SharpCharts. We can substitute total issues for advances plus declines. The StockCharts.com Breadth Thrust indicator would then be the 10-day EMA of Advances divided by Total Issues.
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Chart 9
According to the Zweig model, a bullish signal occurs when the Breadth Thrust indicator moves from below .40 to above .615. Chart 9 shows the NY Composite ($NYA) in the main chart window and the Breadth Thrust indicator as measured by the 10-day EMA of Advances divided by Total Issues. Since March 2009, there have been only three bullish breadth thrust signals based on Advancing Issues: March 2009, March 2010 and July 2010. Even though the current surge is certainly strong, we have yet to see a move above the bullish threshold.
Charting Tips: The indicator ($NYADV:$NYTOT) is plotted twice: once in as a normal indicator and once behind the indicator. Both are invisible. The first invisible indicator is used to apply a 10-day EMA using advanced options. Making the main indicator invisible puts the focus on the 10-day EMA. The second invisible indicator is used to apply the two horizontal lines (.40 and .615). You can click this chart to see the settings and save it to your favorites.
