STOCKS DECLINE SHARPLY WITH BEARISH BREADTH SURGE -- UTILITIES HOLD UP THE BEST -- MICRO-CAPS AND SMALL-CAPS LEAD LOWER -- NY COMPOSITE TRACES OUT HEAD-AND-SHOULDERS PATTERN -- NASDAQ BACKS OFF RESISTANCE AGAIN XLI AND SMH TEST 2011 LOWS
STOCKS DECLINE SHARPLY WITH BEARISH BREADTH SURGE... Link for todays video. Negative news on the economy and the debt-ceiling debacle knocked the wind out of stocks on Wednesday. First, Durable Goods orders unexpectedly declined in June. Second, the Feds beige book showed slowing in eight of twelve regions. Third, the debt-ceiling debacle is raising the specter of a credit down grade for US debt. Wednesdays selling was across the board with all nine sectors moving lower. Chart 1 shows the Nasdaq Net Advances Ratio ($NAAD:$NATOT) and Net Advancing Volume Ratio ($NAUD:$NATV). The Net Advances Ratio reached its lowest point of the year today (-.72). The Net Advancing Volume Ratio recorded its 2011 low in late February (blue arrow). Chart 2 shows the NYSE Net Advances Ratio ($NYAD:$NYTOT) and the Net Advancing Volume Ratio ($NYUD:$NYTV). The Net Advances Ratio hit a 2011 low today. The Net Advancing Volume Ratio hit its 2011 low the first week of July. Todays 2011 lows in the Net Advances Ratio shows an increase in selling pressure. This is a bearish breadth surge that could have medium or long-term consequences.
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
UTILITIES HOLD UP THE BEST... Eight of the nine sector SPDRs were down more than 1% and four were down more than 2%. The Utilities SPDR (XLU) ended the day with the smallest loss and therefore showed relative strength. Chart 3 shows XLU within an uptrend overall as it challenges its May-June highs. The indicator window shows the Price Relative (XLU:SPY Ratio) bottoming in late February and moving higher the last few months. Utilities are showing relative strength, which indicates that the market is turning more defensive. A defensive oriented market is less interested in the riskier parts of the market.
(click to view a live version of this chart)
Chart 3
MICRO-CAPS AND SMALL-CAPS LEAD LOWER... The Russell 2000 ETF (IWM) and Russell Microcap Fund (IWC) were especially hard hit on Wednesday. This makes sense because smaller stocks are more domestic oriented and hence more dependent on the domestic economy. Smaller companies are also more vulnerable to slowing growth. The PerfChart below shows the year-to-date performance of five major index ETFs relative to the S&P 500 ETF (SPY). Even though all five are up on an absolute basis, only three are up on a relative basis (more than SPY). The Russell 2000 ETF (teal) and the Russell Microcap Fund (black) are up LESS than SPY, which means these two high-beta ETFs are underperforming the S&P 500. This is not normal bull market situation. Small-caps and micro-caps should be outperforming the stodgy old S&P 500 during an up year. This Relative weakness represents bearish undercurrents at work in the market right now.
(click to view a live version of this chart)
Chart 4
Chart 5 shows the Russell Microcap Fund (IWC) with a Head-and-Shoulders pattern similar to that seen in the NY Composite (see below). The Price Relative, which shows the performance of IWC relative to SPY, peaked in early April and formed a lower high in July. This confirms that micro-caps are lagging large-caps.
(click to view a live version of this chart)
Chart 5
NY COMPOSITE TRACES OUT HEAD-AND-SHOULDERS PATTERN... Even though the pattern has yet to be confirmed, the NY Composite ($NYA) is tracing out a potential Head-and-Shoulders reversal pattern. Chart 6 shows this pattern extending the entire year (2011). In fact, 2011 has been one big consolidation with little movement in the index. It could be a big distribution pattern. A break below neckline support would confirm the reversal and project further weakness towards the next support zone in the 7400 area. This area marks a 61.80% retracement of the August-May advance. The October-November lows confirm support here as well.
(click to view a live version of this chart)
Chart 6
Classic technical analysis teaches us that volume is an important part of the Head-and-Shoulders pattern. I elected to ignore volume because we are dealing with exchange volume. Big banks have dominated NYSE volume lately, especially before Citigroup had its 1-10 reverse split. There are also the so-called dark pools representing big trades that occur off the major exchanges. For these reasons, I am not a big fan of exchange volume. It is simply a personal preference.
NASDAQ BACKS OFF RESISTANCE AGAIN ... Chart 7 shows the Nasdaq hitting resistance from the April-May highs twice this month. The index failed to hold above 2850 the first week of July and again this week. While it is still too early to call for a major trend reversal, the sharpness of todays decline reinforces resistance here. Pattern-wise, a trading range is in force for 2011 with resistance just above 2850 and support in the 2600 area. This weeks big failure at resistance opens the door to another support test.
(click to view a live version of this chart)
Chart 7
INDUSTRIALS SPDR AND SEMICONDUCTOR HOLDRS TEST 2011 LOWS... With a sharp decline this month, the Industrials SPDR (XLI) is testing support from the 2011 lows. The Finance SPDR (XLF) is by far the weakest of the nine sector SPDRs. XLI is vying for second place after a sharp decline in July. Chart 8 shows XLI on the verge of breaking support from the March-June lows. Except for XLF, the other seven sector SPDRs are still above these lows. This means XLI shows relative weakness. The chart pattern is familiar: a big advance followed by a big consolidation. A break below consolidation support would be a bearish development that would argue for a deeper retracement of the August-April advance. A 61.80% retracement would extend to the 31.50-32 area. The indicator window shows the Aroon Down (red) surging above Aroon Up (green) and hitting 100.
(click to view a live version of this chart)
Chart 8
The beleaguered Semiconductor HOLDRS (SMH) is also testing support from the 2011 lows with a sharp decline on Wednesday. Chart 9 shows SMH failing in the gap zone around 34 and gapping down again today.
