STOCK ADVANCE SLOWS, BUT REFUSES TO BUCKLE -- FINANCE IS THE TOP SECTOR FOR 2012 -- FINANCE AND TECHNOLOGY SECTORS EXTEND HIGHER -- SEMICONDUCTOR ETF RECORDS 52-WEEK HIGH -- NVIDIA AND INTEGRATED DEVICE TECH BREAK AUTUMN HIGHS
STOCK ADVANCE SLOWS, BUT REFUSES TO BUCKLE... Link for todays video. The stock market remains in an utprend overall, but trading has turned indecisive over the last few days. Basically, stocks are in a holding pattern of sorts. The trend is clearly up and turning bearish now would be an aggressive top picking exercise. On the other hand, stocks are quite overbought and ripe for a correction. Chart 1 shows the S&P 500 ETF (SPY) with a surge in October, triangle consolidation in November-December and breakout advance in January. Stocks have been moving steadily higher since December 19th (blue arrow). SPY is up over 10% from its low a mere eight weeks ago. Even though there are no signs of weakness or selling pressure, the advance slowed the last few days as volatility contracted even further. The indicator window shows the Average True Range (ATR), which is a volatility indicator created by Wells Wilder. See our ChartSchool article for details.
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Chart 1
I am showing 1-period ATR and its 20-day SMA. Notice how the 20-day SMA hovered around 3 in September-October and then slowly worked its way lower the last few months. The 20-day average for ATR is now below 1.50 and volatility is the lowest its been since July. In fact, Mondays ATR reading was the lowest level in several months. It was even low by January standards. Such low volatility signals some indecision, however, it does not signal a significant increase in selling pressure. At worst, there is a stalemate between buying pressure and selling pressure. Fridays gap is still holding and SPY established a very short-term support level with this weeks low. A break below this low would signal an uptick in selling pressure and possibly the start of a corrective period. Broken resistance in the 126-128 area turns into the next significant support zone to watch.
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Chart 2
FINANCE IS THE TOP SECTOR FOR 2012... An advance is healthy when at least three of the four offensive lead the market (outperform). The four offensive sectors are consumer discretionary, finance, industrials and technology. Year-to-date, all four offensive sectors are outperforming the S&P 500. In other words, they are all up more than the broad market index. More importantly, the beleaguered finance sector is leading them all. Chart 3 shows the S&P Sector PerfChart with the nine sector SPDRs. This chart measures relative performance, which is the gain/loss in the SPDR less the gain/loss in the S&P 500. SPDRs with positive relative performance are outperforming the market, while SPDRs with negative relative performance are underperforming. Chart 4 shows the absolute performance for the S&P 500 and the nine sector SPDRs for reference. Notice that the consumer staples sector is flat year-to-date and the utilities sector is down. Defensive sectors are clearly lagging as the market embraces risk in 2012.
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Chart 3
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Chart 4
FINANCE AND TECHNOLOGY SECTORS EXTEND STEADY ADVANCE... On the price charts, the key offensive sectors are clearly trending higher. The most recent advance began on December 19th and these sectors have been moving steadily higher the last eight weeks. How long can this go on? A look back at the S&P 500 shows at least three six month periods when stocks moved steadily higher. These are July-06 to February-07, July-09 to January-10 and August to February 2010. I am not necessarily calling for this advance to extend another two to four months, but chartists should keep in mind that anything is possible. Chart 5 shows the Finance SPDR (XLF) breaking its October high and broke resistance turning first support in the 14 area. Chart 6 shows the Technology SPDR (XLK) breaking its 2011 highs, which marks neckline resistance for a large inverse head-and-shoulders pattern. Broken resistance turns first support in the 26.50 area.
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Chart 5
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Chart 6
Chart 7 shows the Industrials SPDR (XLI) heading for a date with its 2011 highs in the 38 area. Chart 8 shows the Consumer Discretionary SPDR (XLY) breaking its 2011 highs and broken resistance turning first support in the 41 area. While we can certainly argue that these SPDRs are overbought and ripe for a correction, they are certainly not weak and we have yet to see any sort of top formation take shape.
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Chart 7
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Chart 8
SEMICONDUCTOR ETF RECORDS 52-WEEK HIGH... Chip stocks remained strong as the Market Vectors Semiconductor ETF (SMH) moved above its May high and recorded a 52-week high. Intel (19.22%), Taiwan Semi (12.45%) and Texas Instruments (7.29%) are the three biggest holdings. Even though the ETF is overbought after a sharp advance the last eight weeks, a fresh 52-week high is a sign of long-term strength, not weakness. Shorter term, the ETF is ripe for a correction that could involve a pullback or sideways consolidation. Chart 9 shows broken resistance turning into the first support zone in the 32.5-33 area.
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Chart 9
NVIDIA AND INTEGRATED DEVICE TECH BREAK AUTUMN HIGHS... Chart 10 shows Nvidia (NVDA) breaking above resistance from the September-November highs. The stock established support in the 13.50 area for three months and then broke out with a sharp surge the last five days. Keep in mind that NVDA is up some 20% in the last three weeks and short-term overbought. While the breakout is bullish, overbought conditions argue for discretion and chartists should put this stock on their watch list for a potential pullback.
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Chart 10
Chart 11 shows Integrated Device Tech (IDTI) with an inverse head-and-shoulders bottom extending back to August. Neckline resistance around 6.50 extends from the September high. IDTI broke resistance in late January, pulled back sharply and then re-captured the breakout with a high volume surge on Friday. Low prices stocks are generally more volatile and risky.
