STOCKS HIT BY LESS-THAN-EXPECTED JOBS GROWTH -- CONSUMER DISCRETIONARY SPDR FAILS AT BROKEN SUPPORT ZONE -- FINANCE AND INDUSTRIALS SPDRS TEST 200-DAY SMAS -- OIL AND COPPER FOLLOW STOCK MARKET LOWER -- SMALL-CAPS CONTINUE TO SHOW RELATIVE WEAKNESS
STOCKS HIT BY LESS-THAN-EXPECTED JOBS GROWTH... Link for todays video. Economic reports have been coming in below expectations over the last two months and todays employment report was no exception. While I would not call the numbers outright negative, job growth was clearly less-than-expected in May and prior months were revised lower. Non-farm payrolls increased by 69,000 in May, which was well below the median estimate of 150,000. This is a big miss, but at least there were not job losses. Nevertheless, Wall Street is about expectations. Reports need to meet or beat these expectations to get a positive response. Stocks reacted negatively to Fridays miss with a sharp decline in early trading. Chart 1 shows the Dow Industrials falling over 200 points and moving below its May low to start the month of June. I showed this chart on May 23rd with my summer target set in the 11500-11700 area and it still stands. Potential support here stems from the 50-61.80% retracement zone and the June 2010 trendline. The indicator window shows the 13-week slope turning negative the second week of May. The price trajectory is clearly down as long as this indicator remains in negative territory. Chart 2 shows the S&P 500 with a target in the 1200-1250 area.
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
CONSUMER DISCRETIONARY SPDR FAILS AT BROKEN SUPPORT ZONE... Chart 3 shows the key Consumer Discretionary SPDR (XLY) falling over 2% in early trading on Friday. After breaking support in May, XLY moved back to the 43.7 area with an oversold bounce. It is not uncommon to see this sort of throwback bounce after a support break and after becoming oversold. This bounce alleviates oversold conditions and broken supports turn into resistance. With a sharp decline the last three days, the ETF has clearly failed at its support break and signaled continuation lower. I am marking the next support zone in the 40.5-41 area. This zone stems from the 50-62% retracement zone, the late January consolidation zone and the rising 200-day moving average.
(click to view a live version of this chart)
Chart 3
FINANCE AND INDUSTRIALS SPDRS TEST 200-DAY SMAS... Chart 4 shows the Finance SPDR (XLF) breaking below its May lows and testing its 200-day moving average on Friday. With this decline, the ETF is in a key retracement zone and nearing broken resistance in the 13.25 area. Despite potential support nearby, there are no signs of firmness or buying pressure on this chart. The ETF went from a market leader in March to a laggard in May. Actually, the finance sector is leading, but in the wrong direction (down). Relative weakness in this key sector is not a good sign for the market overall. First resistance is set at 14.25.
(click to view a live version of this chart)
Chart 4
Chart 5 shows the Industrials SPDR (XLI) breaking neckline support in mid May and this support break turning into resistance in late May. The ETF broke rising wedge support this week and is now trading below the 200-day moving average. Potential support in the 33.5-34 area also stems from broken resistance and the 61.80% retracement line. However, as with XLF, the Industrials SPDR shows no signs of firmness or buying pressure. First resistance is set at 35.50.
(click to view a live version of this chart)
Chart 5
OIL AND COPPER FOLLOW STOCK MARKET LOWER... Chart 6 showsSpot Light Crude ($WTIC) extending its decline with a sharp move lower this week. This is an end-of-day (EOD) chart that will not be updated until after the close. However, note that $WTIC hit the $83 mark and entered a potential support zone on Friday. Estimating support in a strong downtrend is difficult, but crude is very oversold and ripe for some sort of consolidation or perhaps even a bounce. Support in the 83 area stems from the July 2009 trendline. Below this level, the 2011 lows mark the next support zone in the 76-80 area. The sharp decline in energy prices presents the market with a double-edged sword. Lower energy prices are positive for consumers, but the decline in energy prices suggests weakness in demand, which is a negative sign for the economy. Chart 7 shows weekly bars for the 12-Month US Oil Fund (USL). The Stochastic Oscillator moved to oversold levels and a basing period is likely needed before mounting a sustained advance.
(click to view a live version of this chart)
Chart 6
(click to view a live version of this chart)
Chart 7
Chart 8 shows Spot Copper ($COPPER) breaking wedge support and falling sharply over the last five weeks. Again, this is an end-of-day (EOD) chart that will not be updated until after the close. The 2010 and 2011 lows mark the next support zone in the 2.8-3 area. The indicator window shows the Correlation Coefficient ($COPPER,$SPX). This indicator has been largely positive the last three years, which means copper and stocks move in the same direction. Demand for industrial metals fluctuates along with the global economy. A downtrend in copper prices suggests weakness in the global economy. Chart 9 shows the Copper ETF (JJC) heading towards support in the upper 30s. Notice that the Copper ETF and the 20+ Year T-Bond ETF (TLT) are negatively correlated for the most part. Separately, gold is bucking the trend today. See my comments in Wednesdays market message for details that still apply.
(click to view a live version of this chart)
Chart 8
(click to view a live version of this chart)
Chart 9
SMALL-CAPS CONTINUE TO LEAD THE MARKET LOWER... All major index ETFs are down today with small-caps leading the way lower. Relative weakness in small-caps foreshadowed the 2012 peak and small-caps still show relative weakness. The Rydex S&P 500 Equal Weight ETF (RSP) contains the same stocks as the S&P 500 and the S&P 500 ETF (SPY), but applies the same weighting (roughly) to each stock. In contrast, the S&P 500 and SPY are weighted according to market capitalization, which means the biggest stocks carry the most weight. Apple (AAPL), the biggest holding for SPY, accounts for around 4.55% of the ETF and has a market cap of $540 billion. Autonation (AN) is one of the smallest holdings in SPY. It accounts for around .01% of SPY and has a market cap of $4.4 billion, which makes it a small-cap stock. The weighting tables are turned in the Rydex S&P 500 Equal Weight ETF, where Apple accounts for .23% and Autonation accounts for .22%. Rarely does one see Autonation on equal footing with Apple.
Chartists can compare the Rydex S&P 500 Equal Weight ETF with the S&P 500 ETF for clues on market preferences. Essentially, RSP represents small and mid-caps stocks within the S&P 500. These stocks are more domestically oriented and more sensitive to changes in the economy. SPY represents large-cap stocks within the S&P 500. These are more diversified and can weather changes in the economy better than small-caps. These large-caps also represent the safest part of the stock market, which should outperform in a flight to safety. In other words, large-caps outperform when a stock market advance narrows and fewer stocks participate.
(click to view a live version of this chart)
Chart 10
Chart 10 shows RSP since the March 2009 low. The Price Relative (RSP:SPY ratio) is shown in the indicator window. Notice how RSP outperformed SPY from March 2009 until June 2011. Small-caps and mid-caps showed relative strength during this timeframe and the bull market was on a strong footing. This indicated an appetite for risk and positive outlook for the economy. Things began to change in 2012 as the Price Relative formed a lower high in the first quarter. Notice the RSP hit a new high and the Price Relative did not confirm. RSP showed relative weakness even as the ETF was recording a new high. The new high did not hold and the Price Relative moved below its 2011 lows. A 52-week low in the Price Relative shows relative weakness in small-caps and mid-caps, which in turn suggest risk aversion and a negative outlook for the economy. On the RSP price chart, the next support zone is in the 41-42.5 area from the August-November lows.
(click to view a live version of this chart)
Chart 11
Chart 11 shows the S&P 100 ($OEX) in the main window and the $OEX:$RUT Price Relative in the indicator window. $OEX (large-caps) lagged the Russell 2000 (small-caps) from March 2009 to July 2011 as the Price Relative steadily declined. The Price Relative turned up in the third quarter of 2011 and formed a higher low in the first quarter of 2102. Large-caps are outperforming as stock investor seek relatively safety in size.
