FEDEX AND UPS WEIGH ON DOW TRANSPORTS -- DOW TRANSPORTS TESTS TRIANGLE TREND LINE -- MEASURING RISK-ON VERSUS RISK-OFF WITH NINE INDICATORS -- TREASURY BOND ETF HITS KEY RETRACEMENT
FEDEX AND UPS WEIGH ON DOW TRANSPORTS ... Link for todays video. FedEx (FDX) is weighing on the Dow Transports after the company lowered guidance for the first quarter. Expectations were already low and FedEx just made them even lower. Unsurprisingly, the company sited weakness in the global economy. Chart 1 shows FDX breaking down in mid July, forming a triangle into August and breaking triangle support at the end of August. Also notice that the stock formed a lower high in mid July and the price relative is trading at its lowest level of 2012. A lower high, triangle break and relative weakness suggest further downside in this economic bellwether. The next support zone resides around 80. Chart 2 shows United Parcel Service (UPS) with a large symmetrical triangle forming from March to August. The stock broke triangle support around 74 and the price relative hit a new 52-week low. This breakdown points to further weakness with the next support zone around 69-70.
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Chart 1
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Chart 2
DOW TRANSPORTS TESTS TRIANGLE TREND LINE... Unlike the broader market, the Dow Transports has gone nowhere since late October 2011. Chart 3 shows the Average piercing the 5000 level at the end of October 2011 and then embarking on a long flat consolidation the next 10 months. The Average was above 5000 the first four months of 2012 and then broke below a support zone in mid May. A large triangle then unfolded and the Dow Transports is currently battling the lower trend line in the 5000 area. A break would argue for a decline towards the 4700 area. The indicator window shows the price relative ($TRAN:$SPX ratio) breaking down again in mid July and hitting a new low. Chartists should note that the Dow Transports is a price weighted average, which means the stocks with the highest prices carry the most weight. The top five weightings are Union Pacific (UNP), FedEx (FDX), Kansas City Southern (KSU), United Parcel Service (UPS) and Norfolk Southern (NSC). With three of the top five coming from the railroad group, rails are the prime driver for the Dow Transports. Chart 4 shows the DJ Railroad Index ($DJUSRR) hitting a new high in July and pulling back below its resistance breakout. Notice that the price relative broke support and rails are starting to underperforming. This is a big negative for the Dow Transports.
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Chart 3
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Chart 4
MEASURING RISK-ON VERSUS RISK-OFF WITH NINE INDICATORS... There are several ways to measure risk-on versus risk-off in the markets. In general, the risk-on trade favors stocks, the consumer discretionary sector, commodities, the Euro and the Aussie Dollar. These are riskier assets with higher reward potential. The risk-off trade favors the consumer staples sector, treasuries, the Dollar and the Yen. These are relative safe-haven assets. Chart 5 shows the five risk-on indicators with the Australian Dollar Trust (FXA) and the S&P 500 ETF (SPY) bottoming in early June and moving higher into early August. These two have a strong positive correlation. The Commodity Index Fund (DBC) bottomed the third week of June, but the XLY:XLP ratio and the Euro Currency Trust (FXE) did not bottom until late July. The consumer discretionary sector is outperforming the consumer staples sector when the XLY:XLP ratio rises. Relative strength in the consumer discretionary sector is positive for the stock market overall. Even though the overall picture still favors the risk-on trade, signs of risk-off are creeping into the market as the Aussie Dollar declined rather sharply the last three weeks (green line). The XLY:XLP ratio, the Euro and Commodities are holding up, but a breakdown in these would be bearish for stocks.
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Chart 5
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Chart 6
Chart 6 shows the risk-off indicators, which rise when the markets turn risk adverse (cautious). The Dollar and the XLP:XLY ratio are falling, which favors the risk-on trade. The Yen ETF (FXY) and the 20+ Year T-Bond ETF (TLT) fell from mid July to mid August, but both turned up sharply over the last two weeks. This points to some risk-aversion. At this point, something needs to give because stocks are unlikely to remain strong when treasuries are moving higher. Continues strength in treasuries would be bearish for stocks. Treasuries, and stocks, will be on the hot seat this Friday with the employment report. Programming note: notice that I switched the symbol order in the XLP:XLY ratio and XLP is now the first symbol (numerator). This means we are measuring the performance of the Consumer Staples SPDR (XLP) relative to the Consumer Discretionary SPDR (XLY). XLP is outperforming when this ratio rises and relative strength in consumer staples points to risk aversion in the stock market.
TREASURY BOND ETF HITS KEY RETRACEMENT... Treasuries will be in the spotlight on Friday as the employment report hits before the open. A weak report will increase the chances of quantitative easing and likely push treasuries higher. Chart 7 shows the 20+ Year T-Bond ETF (TLT) bottoming near 121 in mid August and moving above 126 last week. This advance broke falling wedge resistance and retraced 61.80% of the prior decline. Now is the moment-of-truth. Further gains above 128 would exceed the 61.80% retracement line and target a challenge to the July high. Such a move would be negative for stocks. On the flip side, a failure near this key retracement and break below support from last weeks low, would be bearish for TLT and positive for stocks. The indicator window confirms this negative correlation. Notice how the Correlation Coefficient (TLT, SPY) has been mostly negative the last six months. This means TLT and SPY move in opposite directions. Chart 8 shows the 10-year Treasury Yield ($TNX) for reference.
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Chart 7
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Chart 8
COPPER, SHANGHAI AND INDUSTRIALS COUNTERED BY HOUSING, RETAIL AND TECHNOLOGY... Overall, the stock remains mixed up with no place to go. Chart 9 shows the S&P 500 ETF (SPY) consolidating since early August. The ETF has crossed the 141 level at least eight times in the last three weeks. Despite this indecision, the bigger trend is up and a small falling wedge is taking shape. A break above 142 would signal a continuation of this uptrend. I am marking key support in the 138-139 area. Broken resistance and the June trend line combine to mark support here.
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Chart 9
Even though the bulls have cause for concern, I think the positives outweigh the negatives. This is, of course, subject to change should we see breakdowns in the key US indices. Chart 10 shows the Shanghai Composite ($SSEC) hitting a new low again this month. Chart 11 shows Spot Copper ($COPPER) consolidating within a bigger downtrend. Note that copper is holding up much better than the Shanghai Composite. Chart 12 shows the Industrials SPDR (XLI) underperforming as the price relative hit a 52-week low. Note that the ISM Manufacturing Index has been below 50 the last three months, which indicates a contraction in the manufacturing sector.
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Chart 10
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Chart 11
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Chart 12
Despite these negatives, there are key parts of the market that remain in bull mode. Chart 13 shows the Home Construction iShares (ITB) hitting a new high this week. Chart 14 shows the Retail SPDR (XRT) leading the market on Tuesday and closing at its highest level since early May. Chart 15 shows the Nasdaq outperforming since late July and forming a flag consolidation the last two weeks. As chartists, we need to look at the full picture. The stock market is at least stable as long as these three remain strong and offset other pockets of weakness.
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Chart 13
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Chart 14
