MOVING AVERAGE TRENDS REMAIN BEARISH -- MORE THAN HALF NYSE STOCKS HAVE FALLEN BACK BELOW 50-DAY AVERAGES -- THE FACT THAT CONSUMER STAPLES ARE DOING BETTER THAN DISCRETIONARY STOCKS THIS YEAR IS A NEGATIVE WARNING
50-DAY LINES REMAIN BELOW 200-DAY... One of the advantages of using moving averages is that they simplify the study of market trends. They tell us the current trend of the market and what needs to happen to reverse that trend. A comparison of 50- and 200-day moving averages is a good example of that. Chart 1, for example, shows the S&P 500 trading beneath both moving average lines. That's a bearish sign. So is the fact that the 50-day average (blue line) remains below the (red) 200-day line. The red circle shows the bearish crossing that took place during August when the shorter average fell below the longer. Another negative sign comes from the fact that the 200-day line is now declining. That's the first time it's turned down since the beginning of 2008. Obviously, those trends need to be reversed in order to improve the market's trend. Crossover signals in exponential moving averages are even more reliable than simple average crossovers. Chart 2 compares the 50 and 200-day EMAs. A bearish crossing took place there as well during August (blue arrow). That's the first time those two EMAs have been negative since 2009. The recent rally brought the blue 50-day EMA closer to the red 200-day EMA. However, the two EMA lines have started to diverge again. The blue line has to cross back above the red line to reverse the bear signal given during August. Both MA versions remain bearish.
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
MORE THAN HALF NYSE STOCKS BACK BELOW 50-DAY LINES... One of last Thursday's messages showed the % NYSE stocks trading above their 200-day averages in bear market territory. Chart 3 shows that measure of the market's major trend falling back below 25% for the first time in a month. That means that 75% of NYSE stocks are still trading below their 200-day averages. A minimum requirement for a market uptrend is for that line to climb above 50%. It's going in the wrong direction. A measure of shorter-term trends is given by the % NYSE stocks trading above their 50-day averages. Chart 4 shows that line having recent climbed above 80% which is overbought territory. It has since fallen back below 50%. That means that more than half of NYSE stocks have fallen back below their 50-day average. That's another bad sign for the market.
(click to view a live version of this chart)
Chart 3
(click to view a live version of this chart)
Chart 4
STAPLES HOLD UP BETTER THAN DISCRETIONARY SECTOR... I love to look beneath the surface of market trends to find hidden messages. To do that, I rely heavily on relative strength ratios which show things that might not be obvious on conventional charts. One technique that I've used successfully in the past is to compare the relative performance of consumer staples and discretionary sectors. [Staples do better when investors are defensive, while discretionary stocks do better when investors are optimistic]. Both sectors have done better than the S&P 500 this year (staples have gained 6%, discretionary stocks 1%, while the S&P 500 has lost 5%). I've heard analysts suggest that relative outperformance by discretionary stocks is good for the stock market. That's generally true, but may hide a more subtle message. The fact that staples have done even better is a potentially negative sign. Chart 5 shows the Consumer Staples SPDR (XLP) trading above both moving average lines. The recent drop in the Consumer Discretionary SPDR (XLY) has pushed it back below those two lines (Chart 6). That suggests a slight turn for the worse in the market. A more revealing comparison, however, is gotten by using ratio analysis.
(click to view a live version of this chart)
Chart 5
(click to view a live version of this chart)
Chart 6
STAPLES OUTPERFORM DISCRETIONARY SPDR... Chart 7 is a relative strength ratio of the Discretionary SPDR (XLY) divided by the Staples SPDR (XLP) since the start of the year. The ratio is clearly in a downtrend. The ratio shows three peaks in February, July, and October. The last peak failed at a resistance line drawn over the first two peaks. The previous two times the ratio dropped, the stock market weakened (compare red arrows). The fact that staples have done better than discretionary stocks this year may carry a more important negative message than the fact that discretionary stocks have done better than the S&P 500.
(click to view a live version of this chart)
Chart 7
FALLING XLY/XLP RATIO IS NEGATIVE WARNING... Chart 8 compares the same XLY/XLP ratio (black line) in the previous chart to the S&P 500 (blue line) since 2000. The main point of the chart is to show that a falling ratio has generally been associated with market weakness, while a rising ratio has generally been associated with market strength. The ratio also shows a tendency of turning before the market. The ratio led the market lower during 2000 and 2007 (red arrows). It turned up before the market during 2002 and 2009 (green arrows). The red line to the right shows the recent downturn during 2011. The premise is simple. When the market is strong, economically-sensitive consumer discretionary stocks do better than defensive consumer staples. When staples are doing better, it's usually a warning that the market uptrend is in trouble. And staples have been doing better so far this year. In order for that negative pattern to improve, the XLY/XLP ratio shown in Chart 7 needs to break its 2011 resistance line.
