RETAIL SPDR STALLS WITH SMALL CONSOLIDATION -- HOME BUILDING ETFS PULL BACK TO BREAKOUTS -- MCCLELLAN OSCILLATORS CONTINUE TO SHOW BREADTH DETERIORATION -- RUSSELL 2000 SERIOUSLY UNDERPERFORMS S&P 100
RETAIL SPDR STALLS WITH SMALL CONSOLIDATION... Link for todays video. Retail stocks are showing early signs of relative weakness that could foreshadow a stock market correction. Chart 1 shows the Retail SPDR (XRT) coming under pressure on Friday with a decline back below 61. The ETF first moved above 61 early last week and then stalled the last eight days. A small consolidation formed with this weeks lows marking support just above 60. A break below this support level would argue for a correction of the prior advance. Such a move could extend to the 54-55 area. Notice that broken resistance turns support in this area and the Fibonacci Retracements Tool clusters in this area. I extended the Fibonacci Retracements Tool from the October and November lows. The first cluster is around 55 from the 38.2% and 50% retracements. The indicator window shows the Price Relative (XRT:SPY ratio) to measure relative performance. Retail stocks outperformed as this ratio advanced from mid January to early March. A lower high may be forming this week and a break below the mid March low would indicate relative weakness in XRT. Whatever happens to retail will affect the consumer discretionary sector. Chart 2 shows the Consumer Discretionary SPDR (XLY) for reference and most likely the market overall.
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Chart 1
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Chart 2
HOME BUILDING ETFS PULL BACK TO BREAKOUTS... The Homebuilders SPDR (XHB) and Home Construction iShares (ITB), whose stocks feature prominently in the consumer discretionary sector, have taken a hit the last few days. Even so, the bigger uptrends remain in place and we have yet to see enough selling pressure to warrant a major trend change. Chart 3 shows XHB moving from the lower left of the chart (early October) to the upper right (mid March) with a clear uptrend. After breaking resistance and hitting a 52-week high above 21.50, the ETF pulled back below 21 with a small correction. At this point, it looks like a throwback to broken resistance, which turns into first support. Support in the 20.50 area is confirmed by the November trendline. The indicator window shows the XHB:SPY ratio in a clear uptrend as XHB remains one of the market leaders. Chart 4 shows ITB pulling back to broken resistance just above 14.
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Chart 3
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Chart 4
MCCLELLAN OSCILLATORS CONTINUE TO SHOW BREADTH DETERIORATION... At the beginning of March I wrote about weakness in the McClellan Oscillators in the second half of February. Stocks were moving higher at the time, but breadth momentum was waning. Flash forward three weeks and the situation remains the same. Stocks moved higher the last three weeks, but the McClellan Oscillators remained relatively weak and moved back into negative territory. The McClellan Oscillator measures the momentum of breadth and the Summation Index is running total of the McClellan Oscillator values. For those unfamiliar with the McClellan Oscillator and Summation Index, a brief description can be found just below the charts.
Chart 5 shows the NYSE Summation Index ($NYSI) in the main window and the McClellan Oscillator ($NYMO) in the indicator window. The Summation Index peaked on 9-February and moved lower the last six weeks, while the NY Composite moved higher (red dotted line). Also notice that the McClellan Oscillator has been mostly negative since 9-February. Despite a sharp two week rally in the NY Composite, the McClellan Oscillator barely turned positive. This rather sizable divergence shows deterioration in breadth momentum that could lead to a correction in stocks.
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Chart 5
Chart 6 shows the Nasdaq McClellan Oscillator ($NAMO) and the Summation Index ($NASI). The Summation Index also peaked on 9-February and moved lower. The McClellan Oscillator bounced into positive territory in mid March, but moved back into negative territory this week. These indicators show that Nasdaq breadth is deteriorating even as the Nasdaq advances, which could foreshadow a corrective period.
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Chart 6
Developed by Sherman and Marian McClellan, the McClellan Oscillator equals the 19-day EMA of the Net Advances Ratio less the 39-day EMA of the Net Advances Ratio. The Net Advances Ratio equals advances less declines divided by total issues. Like MACD, the resulting indicator forms an oscillator that fluctuates above and below the zero line. Basically, the McClellan Oscillator measures the momentum of breadth. The McClellan Summation Index is the sum of each days McClellan Oscillator reading. The Summation Index declines when the oscillator is negative and advances when positive. You can read more on these indicators in our ChartSchool
RUSSELL 2000 SERIOUSLY UNDERPERFORMS S&P 100 ... Relative weakness in small-caps can be blamed for the deterioration in the McClellan Oscillators. Breadth indicators based on advances and declines reflect the performance of small and mid caps. This is because there are more small and mid cap stocks than large cap stocks, way more. Regardless of market cap, an advance equals +1 and a decline equals -1. Breadth indicators based on advancing volume and declining volume, on the other hand, reflect the performance of large caps because large caps high trade higher volume than small caps. Chart 7 shows the Russell 2000:S&P 100 ratio ($RUT:$OEX), which is known as the price relative. It shows the performance of the Russell 2000 relative to the S&P 100. The line rises when the Russell 2000 outperforms and falls when the Russell 2000 underperforms. This ratio peaked on 3-February and moved lower the last seven weeks. There was a brief bounce in early March, but the ratio turned down again the last two weeks and small-caps are seriously underperforming large-caps. This is a potential negative for the overall market because small-caps are like the canaries in the coal mine. They are the first to benefit from an upturn in the economy and the first to suffer during a slowdown.
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Chart 7
A similar pattern is visible when comparing the S&P MidCap 400 ($MID) and the S&P 500. Chart 8 shows the $MID:$SPX ratio peaking on 16-Feb and moving lower the last 5-6 weeks. Mid caps are seriously underperforming large-caps. Chart 9 shows the same picture for the S&P 500 Equal Weight Index ($SPXEW) and the S&P 500.
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Chart 8
