SMALL-CAPS LEAD STOCKS LOWER AGAIN -- DOWNSIDE TARGET FOR SPY IS AROUND 100 -- WEAKNESS IN RETAILERS PUSHES XLY BELOW SEPTEMBER LOWS -- JUNK BONDS PLUNGE AS TREASURIES SURGE -- DOLLAR EXTENDS SURGE AS EURO PLUNGES
SMALL-CAPS LEAD STOCKS LOWER AGAIN... Link for todays video. Stocks moved broadly lower on Monday with small-caps leading the way. All major index ETFs were down 2% or more. Eight of the nine sector SPDRs were down 2% or more. Only the Consumer Staples SPDR (XLP) was down less. Chart 1 shows the Russell 2000 ETF (IWM) leading the way with a 5+ percent loss on Monday. The ETF broke below its August lows and recorded a fresh 52-week low. This chart was shown in Wednesdays Market Message as IWM broke back below triangle support. Last weeks breakdown signaled a continuation of the July-August decline. Chartists can now mark first resistance at 72, which is the mid September high. With todays market leading decline, the Price Relative (IWM:SPY ratio) moved to another 52-week low. Small-caps have been showing relative weakness in July and relative performance continues to deteriorate.
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Chart 1
A weekly chart is needed to see the next downside target. Chart 2 shows weekly prices with next support in the 57-58 area. The 2010 lows and the 50-61.80% retracement zone mark support here. Should the decline overshoot this support zone, we could see a move to the 61.80% line at 53.51, which is over 13% lower than current levels.
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Chart 2
DOWNSIDE TARGET FOR SPY IS AROUND 100... Chart 3 shows the S&P 500 ETF (SPY) breaking below flag support with a decline the last three weeks. This signals a continuation of the July-August decline. Chartists can use the Fibonacci Retracements Tool and prior lows to find the next support zone. The 50% retracement and 2010 lows mark the next support zone in the 100 area. Momentum turned bearish when StochRSI moved below .20 in March 2011. It would take a move back above .80 to reverse this signal. Notice how SPY failed to even make it back above .70 in late April and early July.
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Chart 3
WEAKNESS IN RETAILERS PUSHES CONSUMER DISCRETIONARY SPDR BELOW SEPTEMBER LOWS... I featured the Consumer Discretionary SPDR (XLY) and the Retail SPDR (XRT) last Friday. Both were still holding up rather well because they had yet to break their September lows. The Price Relatives were also at high levels as both ETFs showed relative strength in September. Things are changing as both broke below their September lows today. This support break follows lower high and failure at a key retracement level. In short, it looks like the July-August decline is continuing. Chart 4 shows XLY breaking below 34.50 with a sharp decline today. Using the Measured Move or Rising Flag technique, the downside target for XLY is in the 30 area. This is more than 10% lower than current levels. Chart 5 shows XRT with a downside target in the 37.50 area. Downside targets, while helpful, should be taken with a grain of salt. In other words, consider these broad targets that are subject to change. The target remains valid as long as the trend is down and the evidence remains bearish. A change in this evidence would negate these downside targets.
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Chart 4
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Chart 5
JUNK BONDS PLUNGE AS TREASURIES SURGE... The move away from risk can be seen by comparing junk bonds to US Treasury bonds. Junk bonds represent the riskiest fixed-income securities. Companies behind these bonds are often dependent on a strong and growing economy to make their debt payments. US Treasuries, on the other hand, represent the least risky fixed-income securities. US Treasures are, of course, backed by the full faith and credit of the US government. When it comes to defaults, we do not even want to consider the consequences of a US default. In any case, junk bond performance is closely tied to the stock market. Chart 6 shows the High-Yield Bond SPDR (JNK) falling over 7% from its early September high. After meeting resistance at the 61.80% retracement mark, the ETF broke support with a plunge the last eight days. JNK broke below its August low with further weakness today. This is another negative for stocks because junk bonds are highly correlated to the stock market. Positive correlation means two securities move in the same direction. Negative correlation means they move in opposite directions. The indicator window shows the Correlation Coefficient for junk bonds and stocks (S&P 500). There was one brief dip into negative territory in May, but this indicator has been overwhelmingly positive the last 12 months. In fact, the indicator has been above +.50 for the most part, which confirms the strong positive correlation.
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Chart 6
While junk bonds move sharply lower today, US Treasuries moved sharply higher. Chart 7 shows the 20+ year Bond ETF (TLT) surging the last three days and challenging its September high. There are two big reasons for the surge in TLT. First, stocks are falling and money is moving to relatively safety. Second, the Feds operation Twist is began today. With this program, the Fed will buy long-term Treasuries and sell short-term Treasuries in an attempt to twist the yield curve. The indicator window shows the Correlation Coefficient for Treasuries and the S&P 500. There was a brief pop into positive territory in May, but this did not last long and the indicator has been largely negative the past year. In fact, the Correlation Coefficient spent most of the last 12 months below -.50, which shows a strong negative correlation with stocks.
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Chart 7
DOLLAR EXTENDS SURGE AS EURO PLUNGES... The Euro and the Dollar are also at the heart of the risk-on/risk-off trade. Risk-on is bullish for the Euro, stocks and oil, while risk-off is bullish for the Dollar and Treasuries. Chart 8 shows the US Dollar Fund (UUP) surging almost 1% today. The ETF is up almost 10% from its August lows and showing no signs of weakness. The only negative is that the Dollar is getting overbought and sentiment towards the Euro is quite bearish. Chart 9 shows the Euro Currency Trust (FXE) moving below 132 for the first time since January. The ETF is oversold, but there are no signs of firmness or support nearby. The November-January lows mark the next support zone in the 128-129 area. The indicator window shows the Correlation Coefficient. The Euro and the stock market (S&P 500) are largely positively correlated. While there were dips into negative territory, the indicator has been positive most of the last 12 months.
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Chart 8
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Chart 9
GOLD AND SILVER IGNORE DOLLAR WITH MOVE HIGHER ... Money moving out of stocks and the Euro also found its way into precious metals the last two days. This is a bit of a surprise considering that the Dollar moved higher the last two days. Overbought conditions and a strong Dollar weighed on gold in September as bullion declined to the 1600 area. Despite a $300 decline, the long-term trend remained up and gold hit a major support zone in late September. Chart 10 shows Spot Gold ($GOLD) retracing 50-61.80% of the January-September advance with the decline to 1600. There is also support in the 1550-1580 area from broken resistance and the trendline extending up from the January low. Gold is now up the last three days with a move back above 1650.
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Chart 10
Can gold move higher with a strong Dollar? That is the big question now. The indicator window shows the Correlation Coefficient for gold and the Dollar. There are periodic moves into positive territory, which shows periods when both move in the same direction. However, the Correlation Coefficient spent most of its time in negative territory. This means that gold and the Dollar are largely negatively correlated, meaning they move into opposite directions. Gold may have a tough time moving higher if the Dollar remains strong. Chart 11 shows Spot Silver ($SILVER) firming around 30-31 the last few days.
