SPY REVERSES COURSE AFTER DOJI -- AD VOLUME LINES REVERSE NEAR BROKEN SUPPORT -- OFFENSIVE SECTORS LAGGING ON ONE AND THREE MONTH TIMEFRAMES -- PRICE RELATIVES BREAK DOWN FOR XLF AND XLY -- 7-10 YEAR T-BOND ETF NEARS HIGH ON FLIGHT TO SAFETY
SPY REVERSES COURSE AFTER LONG WHITE CANDLE AND DOJI... Link for todays video. After moving higher four of the last five days, stocks are taking a hit today as concerns in Europe bubble up. Chart 1 shows the S&P 500 ETF (SPY) moving higher since early June and then forming a doji on Thursday. Doji signal indecision that can foreshadow a short-term trend reversal. Should a long black candlestick form today, an evening doji star to form on the price chart. As far as the medium-term uptrend is concerned, I am watching key support at 132.5 and Percent Price Oscillator (PPO) support at zero. A break below both these levels would reverse the seven week uptrend and signal a continuation of the April-May decline. Even though SPY is trading near its early May levels, I have my doubts about this rally and its sustainability. There are a number of factors supporting this assumption and I will show them in charts below.
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Chart 1
AD VOLUME LINES REVERSE NEAR BROKEN SUPPORT ZONES... Chart 2 shows the Nasdaq AD Volume Line ($NAUD) breaking down in May and rebounding from early June to early July. This rebound is falling short as the bounce reversed and broke the June trend line last week. Chart 3 shows the NYSE AD Volume Line ($NYUD) also breaking support in May and broken support turning into resistance in early July. With last weeks decline, the AD Volume Line broke below the June trend line and has yet to fully recovery.
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Chart 2
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Chart 3
OFFENSIVE SECTORS LAGGING ON ONE AND THREE MONTH TIMEFRAMES... Chart 4 shows the S&P Sector PerfChart for the one time frame and chart 5 shows the three month timeframe. Note that these PerfCharts show relative performance, which is the amount the SPDR is leading or lagging the S&P 500. SPDRs in positive territory are leading and outperforming, while SPDRs in negative territory are lagging and underperforming. Both PerfCharts show the same picture: the offensive sectors are underperforming and the defensive sectors are outperforming. The offensive sectors include consumer discretionary, finance, industrials and technology. The defensive sectors are consumer staples, healthcare and utilities. Relative strength in the defensive sectors indicates that the market is avoiding risk and embracing safety. Risk aversion is negative for the broader market.
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Chart 4
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Chart 5
PRICE RELATIVES BREAK DOWN FOR XLF AND XLY ... Further evidence of relative weakness can be seen on the price relatives for the Finance SPDR (XLF) and the Consumer Discretionary SPDR (XLY). The price relative is a ratio plot that compares the performance of the SPDR to the market benchmark (SPY). Chart 6 shows the XLF:SPY ratio breaking below the early July low as XLF underperforms SPY this month. On the price chart, XLF formed a rising wedge that retraced 61.80% of the April-May decline. The ETF is meeting resistance near broken support and a break below the early July low would signal a continuation of the April-May decline.
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Chart 6
Chart 7 shows the Consumer Discretionary SPDR (XLY) breaking above triangle resistance on Thursday, but closing well off its high and moving lower on Friday. This could be a failed breakout. Perhaps another rising wedge is taking shape as the SPDR fails near the 61.80% retracement for the third time in five weeks. The mid June lows mark key support still and it would take a break below these levels to fully reverse the rising wedge. The indicator window shows the XLY:SPY ratio peaking way back in early May and moving below support in late June. Relative weakness in the most economically sensitive sector is negative for the broader market.
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Chart 7
7-10 YEAR T-BOND ETF NEARS HIGH ON FLIGHT TO SAFETY... I heard a new term on Bloomberg radio the other day: RORO. I think it is pronounced with long os, kind of like row-row. It stands for risk-on risk-off. We have heard these terms often in the last few years. Even though the stock market has been risk-on the since early June, treasuries and the Dollar are still showing risk-off. What do these two know that the stock market does not? In any case, chart 8 shows the 7-10 year T-Bond ETF (IEF) moving to a new high this month and advancing above 109 today. IEF may be overbought and overvalued, but it is clearly in an uptrend.
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Chart 8
The indicator window shows the Correlation Coefficient (IEF,SPY). Stocks and treasuries have been negatively correlated for most of the last 12 months. The Correlation Coefficient did turn positive for short periods and these are shown in yellow. A positive correlation means both are moving the same direction and something usually has to give. The Correlation Coefficient was positive in early November and stocks gave in with a decline later than month. Treasuries gave in to the positive readings in mid January and early February as IEF declined in March. Most recently, the Correlation Coefficient turned positive in early May and stock gave in by falling sharply. Flash-forward to July and the Correlation Coefficient is once again positive. Something has to give, and perhaps soon.
EURO CURRENCY TRUST PLUNGES TO NEW LOW... Chart 9 shows the Euro Currency Trust (FXE) moving to a new 52-week low on Friday. The big trend is clearly down and the ETF has fallen over 8% from its early May high. Even though the ETF is getting quite oversold, there are no signs of strength as money moves out of the EU. Chart 10 shows the US Dollar Fund (UUP) bouncing for the first time in six days. The ETF hit a new 52-week high last week and remains in a long-term uptrend. With stocks and the Dollar mostly negatively correlated, strength in the greenback is negative for US equities.
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Chart 9
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Chart 10
SPANISH AND ITALIAN STOCKS GET CLOBBERED... Even though the US and Euro are not joined at the hip, events in the EU do affect US sentiment and a recession in Europe would be negative for the US economy. EU leaders approved a 100 billion Euro bailout for Spanish banks and Spanish equities reacted with a sharp sell off. In addition, the yield on 10-year Spanish bonds moved above 7% as these bonds declined for the seventh straight day. The bond and equity markets do not have much faith in this bailout. Chart 11 shows the DJ Spain Index ($ESDOW) breaking a rising wedge trend line and then plunging over 6% today. Chart 12 shows the DJ Italy Stock Index ($ITDOW) falling over 4% and breaking the June trend line. Chart 13 shows the DJ Germany Index ($DEDOW) hitting resistance at broken support and the 61.80% retracement line. The trend since early June remains up with the July lows marking key support.
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Chart 11
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Chart 12
