RELATIVE WEAKNESS IN XLF AND XLY PRECEDED 2007 PEAK -- XLY, XLI AND IWM ARE HOLDING UP WELL -- BONDS EXTEND GAINS AFTER CPI REPORT -- REVISITING THE FOSBACK HIGH LOW LOGIC INDEX -- NASDAQ AND NYSE NEW LOWS RATIOS REMAIN SUBDUED
RELATIVE WEAKNESS IN FINANCE AND CONSUMER DISCRETIONARY PRECEDED 2007 PEAK... Link for todays video. The performance of small-caps and the four offensive sectors is important to the health of the market. Small-caps represent domestic oriented companies that are more sensitive to the economy. The offensive sectors represent four distinct parts of the market. The consumer discretionary sector is the most economically sensitive. Finance represents the banking system. Technology represents high-beta growth stocks and the appetite for risk. Industrials represent the backbone of the manufacturing economy. John Murphy noted relative weakness in the Technology ETF (XLK) and Finance SPDR (XLF) on Tuesday and relative strength in the Consumer Staples SPDR (XLP) and Healthcare SPDR (XLV) on Thursday. In keeping with this theme, lets look at small-cap and offensive sector performance at the 2007 peak.
Chart 1 shows the S&P 500 ETF and Russell 2000 ETF in the main chart window with the four offensive sectors split in the indicator windows. Notice that IWM did not exceed its July high and formed a lower high in October 2007. With SPY exceeding its July high, small-caps were showing relative weakness in October 2007. The Consumer Discretionary SPDR and Finance SPDR also showed relative weakness in October 2007. Notice that both ETFs formed lower highs from July to October. The Industrials SPDR and Technology ETF were holding up well in October 2007, but it was not enough to offset relative weakness in small-caps, finance and consumer discretionary. SPY formed a major top from April to December 2007 and broke support in January. Yes, it was an 8-9 month topping process.
(click to view a live version of this chart)
Chart 1
CONSUMER DISCRETIONARY, INDUSTRIALS AND SMALL-CAPS STILL HOLDING UP WELL... Chart 2 shows these same ETFs as they currently stand. SPY almost reached its February high and IWM moved above its February high this month. This shows relative strength in small-caps, which is positive overall. The Finance SPDR and the Technology ETF fell well short of their February highs and showed relative weakness the last few months. Chalk up two negatives for relative weakness. Despite these negatives, the Industrials SPDR did forge a 52-week high and the Consumer Discretionary SPDR came close to its February high. There are some cracks appearing in the uptrend that began in March 2009, but we have yet to see a major topping pattern emerge in SPY or the other major index ETFs.
(click to view a live version of this chart)
Chart 2
BONDS EXTEND GAINS AFTER CPI REPORT... The Labor Department reported a rise in the Consumer Price Index (CPI) on Friday morning, but Core-CPI (less food-energy) rose less than expected. While I am not sure who can avoid buying food and energy, the bond market evidently liked these numbers and continued higher on Friday. Chart 3 shows the 20+ year Bond ETF (TLT) surging over 2% in the last four days. The ETF broke the flag trendline midweek and is poised to challenge resistance from the early April high. This looks like a breakout that signals a continuation of the February-March advance. From a stock market perspective, a surge in bonds could be negative because stocks and bonds have been negatively correlated for some time now. Chart 4 shows the 7-10 year Bond ETF (IEF) with a similar chart. Chart 5 shows the 10-year Treasury Yield ($TNX) breaking wedge support.
(click to view a live version of this chart)
Chart 3
(click to view a live version of this chart)
Chart 4
(click to view a live version of this chart)
Chart 5
REVISITING THE FOSBACK HIGH LOW LOGIC INDEX... Norman Fosbacks High Low Logic Index has yet to trigger a bearish signal. A recent column by Mark Hulbert prompted me to check in on this breadth indicator. We last visited the High-Low Index in the Market Message on 18-Aug-2010. Despite market weakness from May to August, this indicator did not trigger a bearish signal. In fact, the last bearish signals were way back in July and October 2007. This indicator is not really designed for both bullish and bearish signals. It is based on the premise that relatively high readings for both new highs and news lows are bearish. Why? A surge in new lows when new highs are relatively high suggests underlying weakness in the market (breadth). Such weakness usually occurs during a topping process as the internals start breaking down.
The High Low Logic Index is based on the ratio of highs to total issues and lows to total issues. Originally, Fosback used weekly numbers and smoothed the ratios with a 10-week EMA. The High Low Logic Index equals the lesser of the two ratios. The logic behind the indicator is that these ratios should vary during normal circumstances. Either the new highs ratio or the new lows ratio should be relatively high, not both. Market conditions are abnormal when both are at relatively high levels or above a specific threshold. I have created a version of this indicator in SharpCharts. Instead of using at 10-day EMA of weekly high-low data, I am using a 50-day EMA of daily high-low data. The threshold for relatively high is set at 2.5% for each ratio. It is potentially bearish when both rise above this level.
NASDAQ AND NYSE NEW LOWS RATIOS REMAIN SUBDUED... Chart 6 shows the NY Composite ($NYA) with the New Highs Ratio ($NYHGH:$NYTOT) and the New Lows Ratio ($NYLOW:$NYTOT) in the indicator windows. First, notice the two sell signals in July and October 2007 (red arrows). Second, notice how the new highs ratio moved below 2.5% in September 2007 and remained below until September 2008. Third, notice how the new lows ratio remained relatively high until March 2009. The subsequent move below 2.5% in April 2009 has now lasted two years. At this point, the new lows ratio holds the key to a potential bearish signal. A move above 2.5% would push this indicator to its highest level in two years.
(click to view a live version of this chart)
Chart 6
Chart 7 shows the Nasdaq with the New Highs Ratio ($NAHGH:$NATOT) and the New Lows Ratio ($NAHGH:$NATOT). Again, sell signals were triggered in July and October 2007 (red arrows). The new lows ratio remained above 2.5% until late April 2009, but the new highs ratio did not cross above 2.5% until October 2009, six months later. Yes, there can be some lag with these indicators. There was almost a sell signal in August, but the new highs ratio had already moved below 2.50%. New lows remain very low and a bearish signal is not possible unless the ratio moves above 2.5%.
