S&P 500 SHRUGS OFF COPPER, THE VIX AND LOW VOLUME -- RETAILERS KEEP THE CONSUMER DISCRETIONARY SECTOR AFLOAT -- NETWORKING AND INTERNET ETFS HOLD THEIR BREAKOUTS -- SEMICONDUCTOR ETF RETURNS TO BROKEN RESISTANCE
S&P 500 SHRUGS OFF COPPER, THE VIX AND LOW VOLUME... Link for todays video. There are plenty of reasons to doubt the current advance in the US stock market. The Shanghai Composite recently hit a 52-week low, copper remains in the doldrums, the CBOE Volatility Index is at very low levels and exchange volume has been low the last four weeks. Despite these negatives, the S&P 500 is trading near its spring highs and in a clear uptrend since early June. Truth be told, Shanghai, copper, the VIX and volume are just distractions. In fact, Mark Hulbert of marketwatch.com debunked low volume in his column this morning. The S&P 500 trend and chart are the only things that really matter.
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Chart 1
RETAILERS KEEP THE CONSUMER DISCRETIONARY SECTOR AFLOAT... What is driving the US benchmark higher? If I had to point to one sector or reason, it would be the consumer discretionary sector because it is the most economically sensitive sector and features many retail names. Chart 2 shows the Consumer Discretionary SPDR (XLY) bottoming in June, surging above its late May high in mid June and then breaking above its July high in August. Trading has turned choppy the last two weeks and the ETF established short-term support with a long white candlestick on Friday. News reports suggested that the prospects of more quantitative easing lifted stocks. Well, we have the mother of all speeches (tongue planted firmly in cheek) on Friday when Fed Chairman Bernanke speaks from Jackson Hole. As John Murphy noted on Tuesday, any disappointment could negatively affect thinly traded markets ahead of a three day weekend. In any case, last weeks low is the first support level to watch for XLY. A break would be short-term negative and argue for a deeper pullback. However, I would not be ready to turn bearish because this would not affect the three month uptrend. Instead, I would focus on the next support zone in the 44.25 area, which is marked by broken resistance. The indicator window show the price relative (XLY:SPY ratio) turning up this month as XLY starts to outperform. This is a positive sign as long as it holds.
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Chart 2
Chart 3 shows the Retail SPDR (XRT) with similar chart features. The ETF broke falling channel resistance in early August and remains in an uptrend overall. The going has been tough the last three weeks, but the breakout is holding. Last weeks low marks first support and the breakout marks key support. The combination creates a support zone. A move below 59.3 would negate the channel breakout and call for a reassessment of my bullish stance.
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Chart 3
NETWORKING AND INTERNET ETFS HOLD THEIR BREAKOUTS... The industry group ETFs within the technology sector may be overbought and consolidating, but their breakouts are holding and I continue to see more strength than weakness. Many ETFs became overbought after the surges from late July to early August. A consolidation or pullback from overbought levels is perfectly normal. For example, the Networking iShares (IGN) and FirstTrust Internet ETF (FDN) surged above their July highs and these breakouts are holding as they consolidate. Chart 4 shows IGN bottoming in mid July and surging above its June highs with a big move in August. There is a resistance zone around 25.5-26 that turns into the first support zone. The breakout is bullish and stands as long as this support zone holds. The indicator window shows IGN moving from laggard to leader as the price relative (IGN:SPY ratio) turned up the last five weeks.
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Chart 4
Chart 5 shows the FirstTrust Internet ETF breaking resistance in early August and the breakout holding the last few weeks. Broken resistance turns into support in the 35.5-35.75 area. This breakout is bullish and valid as long as support holds. A small flat flag formed the last eight days and a break above resistance would signal a continuation higher. The indicator window show the price relative (FDN:SPY ratio) turning up the last few weeks and breaking its mid July high. FDN is starting to show some relative strength.
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Chart 5
SEMICONDUCTOR ETF RETURNS TO BROKEN RESISTANCE... The Market Vectors Semiconductor ETF (SMH) also broke resistance with a big move and then corrected the last two weeks. Chart 6 shows SMH breaking above its June highs and broken resistance turning into support. SMH declined back to the breakout for its first test. A successful test would keep the breakout alive and bullish. A move back below 32.50 would question the breakout and call for a reassessment.
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Chart 6
A TALE OF TWO SEMICONDUCTOR STOCKS INTC/TXN... Semiconductor stocks used to be a very homogeneous group that moved up and down together. This is not the case currently. Intel (INTC) and Lam Research (LRCX) are relatively weak and trading near their June lows. Texas Instruments (TXN) and Applied Materials (AMAT) are trading above their June highs and leading the group. Chart 7 shows Intel testing the June-July lows after a sharp decline last week. Intel (18.6%) is by far the biggest component of SMH. Intel is currently forming a descending triangle, which is a bearish continuation pattern. A break below support would target a move towards the December low. Support has yet to fold as the stock consolidates the last 3-4 days. A surge off support on expanding volume and a break above 25.10 would argue for a reassessment. The indicator window shows the price relative trending lower since May.
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Chart 7
In contrast to Intel, chart 8 shows Texas Instrument breaking above its June highs with a big surge above 29 this month. The breakout is holding so far, but TXN is hitting some resistance from the 50-61.80% retracement. Even though an overbought pullback is normal, I would become concerned if this breakout fails to hold. Notice that TXN formed a small pennant the last 4-5 days. Watch these boundaries for the next short-term signal.
