SPY CONTINUES TO STALL AT HIGH LEVELS -- S&P 500 EQUAL-WEIGHT ETF SHOWS SERIOUS RELATIVE WEAKNESS -- DOW TRANSPORTS LEAD THE MARKET LOWER -- UPS AND FEDEX WEIGH ON PRICE-WEIGHTED AVERAGE -- EURO STALLS AFTER SHORT SURGE
SPY EXTENDS HIGH LEVEL STALL... Link for todays video. The Fed came and went, but stocks did not react much. There was a little volatility around announcement time, but stocks settled back into their narrow ranges of the last three days. In its policy statement, the Fed noted that economic growth did indeed slow over the last six months and downgraded its view on the economy. Despite this fairly negative outlook, the Fed did not announce a new quantitative easing program or extend its low-rate pledge. Perhaps the market, and the Fed, is waiting on the European Central Bank (Thursday) and the employment report (Friday). Chart 1 shows the S&P 500 ETF (SPY) surging above 138 last week and then stalling in the 138-139 area the last three days. The wedge continues to rise and define the two month uptrend. The July lows mark key support in the 132.50 area. The indicator window shows the Percent Price Oscillator (PPO) moving into positive territory in mid June and holding positive throughout the rising wedge. A move into negative territory would turn momentum bearish. Chart 2 shows the Nasdaq 100 ETF (QQQ) battling resistance in the 65 area.
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Chart 1
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Chart 2
S&P 500 EQUAL-WEIGHT ETF CONTINUES TO SHOW RELATIVE WEAKNESS... The Russell 2000 ETF, S&P MidCap 400 SPDR and S&P 500 Equal-Weight ETF (RSP) have been underperforming the S&P 500 ETF since February. In fact, the price relatives for these three ETFs hit new 2012 lows recently. The price relative is a ratio chart. For example the RSP:SPY ratio shows the performance of RSP relative to SPY. This ratio rises when RSP outperforms and falls when RSP underperforms. Chart 3 shows this S&P 500 Equal-Weight ETF hitting resistance at 50 for the third time since early July. RSP broke support in the 49.5-50 area in May and this area is now turning into resistance. This support break is valid until RSP breaks back above resistance. Failure at resistance and a break below the July lows would reverse the two month uptrend and call for a continuation of the April-May decline.
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Chart 3
The indicator window shows the price relative (RSP:SPY ratio) peaking in February and moving steadily lower the last 5-6 months. The indicator broke its October low in May and moved to fresh 52-week lows in June and July. Relative weakness in RSP is a concern because this ETF represents the smaller companies within the S&P 500. These companies typically have higher betas and relative weakness suggest a certain risk aversion in the market right now.
DOW TRANSPORTS LEAD THE MARKET LOWER... In the Market Message on July 24th, John Murphy identified a breakdown in the Dow Transports and warned of a possible Dow Theory sell signal. Mario Draghis dramatic Euro rescue pushed stocks sharply higher last week to stave off this signal. Nevertheless, the possibility remains and the Dow Transports are again showing relative weakness. Chart 4 shows the Dow Transports moving back above 5100 last week, but falling right back below 5000 today. Notice that the Average broke support in May and then consolidated in June-July with a triangle. The triangle break forged a lower low and the Dow Transports look vulnerable to further weakness. The indicator window shows the price relative breaking support with a sharp decline the last few week. Also note that the price relative recorded a 52-week low today. This key component of Dow Theory shows some serious relative weakness since mid July. Relative weakness is often followed by absolute weakness. Chart 5 shows the Dow Industrials with a rising wedge taking shape and key support marked at 12500.
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Chart 4
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Chart 5
UPS AND FEDEX WEIGH ON PRICE-WEIGHTED AVERAGE... Like the Dow Industrials and Dow Utilities, the Dow Transports is a price-weighted average in which the stocks with the highest prices carry the most weight. Stocks like FedEx ($89 per share) and United Parcel Service ($75 per share) carry a lot of weight in this 20 stock Average. After Union Pacific ($122.50 per share), FedEx and UPS are the second and third biggest components in the Dow Transports. These global shippers are also good proxies for the economy, the global economy. Chart 6 shows FDX breaking double top support in April and then forming a rising wedge in June-July. With a sharp decline below 89, the stock broke wedge support to signal a continuation lower. Last weeks surge back to 91 was a throwback as the lower trend line of the rising wedge turned into resistance. The indicator window shows the FDX:$SPX ratio breaking support with a decline the last few weeks. This means FDX is showing relative weakness and underperforming the broader market. Chart 7 shows UPS breaking down in late July and the price relative (UPS:$SPX ratio) hitting a new low for 2012.
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Chart 6
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Chart 7
EURO STALLS AHEAD OF BIG ECB MEETING... The Euro will be in the spotlight tomorrow as the European Central Bank (ECB) meets to decide policy. Big promises from ECB President Mario Draghi pushed the Euro sharply higher last week and he must now deliver. Chart 8 shows the Euro Currency Trust (FXE) within a clear downtrend over the last 12 months. The ETF hit a new 52-week low in late July. Last weeks surge above 122 is short-term positive, but it still looks like an oversold bounce within a bigger downtrend. The Euro is under pressure today because the Dollar is moving higher after the Fed failed to announce more easing. Last weeks high marks first resistance and I am setting long-term resistance at 128. Chart 9 shows the US Dollar Fund (UUP) getting a bounce today and establishing first support at 22.60.
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Chart 8
