FIVE BIG STOCKS THAT ARE UNDERPERFORMING THIS MONTH -- BROKEN RESISTANCE MARKS FIRST SUPPORT FOR SPY -- QQQ UNDERPERFORMS IN SEPTEMBER -- RETAIL SPDRS STARTS TO UNDERPERFORM -- NASDAQ AD VOLUME LINE FORMS BEARISH DIVERGENCE
FIVE BIG STOCKS THAT ARE UNDERPERFORMING THIS MONTH... Link for todays video. While there is no denying the long-term uptrend, chartists should keep in mind that stocks are up substantially since early June and ripe for some sort of corrective period. A correction can involve a pullback or a consolidation. Also note that the S&P 500 ETF (SPY) is priced for perfection as it trades above its spring highs. I mention this because recent earnings reports from some big names have disappointed and their stocks have fallen as a result. PerfChart 1 shows the S&P 500 with five big companies that disappointed and were punished over the last few weeks. The negative news is not so important, but the negative reaction to this news is important. The S&P 500 is up just over 2% this month, but these five stocks are down. Global shipper FedEx (FDX) is down around 3%. Chip titan Intel (INTC) is down over 8%. Industrial behemoth United Technologies (UTX) is down over 3%. Software giant Oracle (ORCL) is down around 1% and sneaker maker Nike (NKE) is down almost 4%. Relative weakness in these big stocks points to some negative undercurrents as we head into third quarter earnings season.
Chart 1
BROKEN RESISTANCE MARKS FIRST SUPPORT FOR SPY... Chart 2 shows SPY over the past year. The ETF is up over 35% from its October 2011 low and up around 14% from its June low. The current overbought situation compares to overbought conditions in late October and late March. After such conditions, notice how SPY traded sideways and then corrected with a sharp decline. The first correction lasted two months (Nov-Dec) and the second lasted around three months (mid March to early June). It is possible that SPY embarks on some sort of trading range now with support in the 139-140 area. This level stems from broken resistance and the late August consolidation. The indicator window shows the Percent Price Oscillator (PPO) turning positive in late June and remaining positive. A move into negative territory would turn momentum bearish.
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Chart 2
QQQ UNDERPERFORMS IN SEPTEMBER ... In another sign of underlying weakness, the mighty Nasdaq 100 ETF (QQQ) is underperforming SPY during September. Chart 3 shows QQQ breaking above its spring highs and stalling above this breakout. Technically, the breakout is holding and QQQ remains in bull mode. Broken resistance and the late August lows turn into support now. A move below 67 would break this support level. The indicator window shows the price relative (QQQ:SPY ratio) peaking in early September and moving lower this month. What is the world coming to if Apple-dominated QQQ cannot outperform SPY?
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Chart 3
Chart 4 shows the Nasdaq 100 Equal-Weight ETF (QQEW). As its name implies, the biggest component (AAPL) counts the same as one of the smallest components (RIMM). QQEW tells a different story than QQQ. While QQQ moved to a new high in September, QQEW underperformed and failed to reach its spring high. A lower high could be forming. Chartists should watch support from the early September low. A break below this level would solidify the lower high and reverse the uptrend that started in early June.
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Chart 4
RETAIL SPDRS STARTS TO UNDERPERFORM... The Retail SPDR (XRT) is a broad based ETF with over 90 retail stocks. Autozone (AZO) is the single biggest component, yet it accounts for only 1.17% of the ETF. The weightings are fairly evenly spread throughout the ETF. I keep close tabs on XRT because retail spending accounts for around 2/3 of GDP. Chart 4 shows an overall uptrend as the ETF recorded a fresh 52-week high in mid September. XRT was overbought near 65 because the ETF was up around 14% from its late July lows. Some sort of pullback or consolidation can be expected to digest these gains. Broken resistance, the December trend line and the Fibonacci cluster converge to mark support in the 59-60 zone. A correction that exceeds this support zone would be deemed excessive and call for a reevaluation of the uptrend.
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Chart 5
Concerns are starting to build when looking at the price relative (XRT:SPY ratio). XRT should outperform SPY in a healthy environment and the price relative should rise, which occurred from January to May. The price relative peaked in May and formed lower highs in July and September. This indicates that XRT has been underperforming SPY since late May. Relative weakness in XRT could foreshadow some weakness in retail spending down the road. The bottom window shows the StockCharts Technical Rank (SCTR) holding 60 throughout the year. The cup is half full as long as this indicator holds 60. A break would signal relative weakness and weigh on the broader market.
NASDAQ AD VOLUME LINE FORMS BEARISH DIVERGENCE ... While the Nasdaq surged to a 52-week high in September, the Nasdaq AD Volume Line ($NAUD) fell well short of its spring highs and turned down the last two weeks. The AD Volume Line is a cumulative measure of net advancing volume, which is the volume of advancing stocks less the volume of declining stocks. Advancing volume represents buying pressure, while declining volume represents selling pressure. Net advancing volume basically measures net buying pressure. The AD Volume Line rises when buying pressure consistently outpaces selling pressure and falls when selling pressure consistently wins the day.
As chart 6 shows, the Nasdaq AD Volume Line has been trending higher since early June, but is nowhere close to its spring highs. Net buying pressure is lagging the index and a bearish divergence is brewing. The indicator window shows MACD of the AD Volume Line. This momentum oscillator remains positive and the bulls still have the edge. A move into negative territory would change this. Chart 7 shows the NYSE AD Volume Line falling just short of its spring highs as the NY Composite exceeded these highs. MACD of the AD Volume Line remains positive though. Look out if both MACDs break into negative territory.
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Chart 6
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Chart 7
NET NEW HIGHS WEAKEN, BUT REMAIN POSITIVE... Net new highs are simply the number of 52-week highs less the number of 52-week lows. This is one of the simplest and effect indicators for market breadth. Basically, the bulls have the edge when new highs exceed new lows and the bears have the edge when new lows prevail. Chartists can look at the raw numbers, use a 10-day EMA or plot a cumulative line for analysis purposes. Admittedly, this indicator is a bit lagging because it takes time to forge 52-week highs and lows. However, traders can establish a clear trading bias based on this indicator.
Chart 8 shows NYSE net new highs ($NYHL) in the indicator window and Cumulative Net New Highs in the main window. First, the indicator window shows net new highs turning positive in June and remaining positive for over three months. Second, the cumulative net new highs line turned up and moved above its 10-day EMA in mid June. Despite deep pullbacks in late June and July, this indicator has remained steadfastly bullish throughout. Even with the pullback over the last two weeks, this indicator continued moving higher as net new highs remained positive. A downtrend is unlikely until there is an expansion in new lows. This would cause the cumulative line to break its 10-day EMA and signal underlying weakness in the stock market. Chart 9 shows Nasdaq net new highs ($NAUD) in positive territory since early August. The indicator fell towards the zero line this week, but has yet to turn negative and the cumulative line remains above its 10-day EMA.
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Chart 8
