DROP IN GOLD MINERS DOESN'T BODE WELL FOR GOLD -- NASDAQ COMPOSITE APPEARS HEADED FOR TEST OF SUMMER LOW -- APPLE IS NEARING A TEST OF ITS MAY LOW -- PROSPECT FOR JUMP IN DIVIDEND TAX MAY EXPLAIN SELLING IN DIVIDEND PAYING STOCKS
GOLD AND SILVER MINERS FALL BELOW CHART SUPPORT... Stocks tied to gold and silver had a bad week. Chart 1 shows the Market Vectors Gold Miners ETF (GDX) falling below its 200-day average and the support line drawn over its June high. That's bad chart action. Gold prices have held up better. But it's unlikely that gold will be able to withstand continued selling in the miners. Gold usually does better when miners are rising along with it. Chart 2 shows the Global X Silver Miners (SIL) also tumbling in heavy trading.
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Chart 1
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Chart 2
NASDAQ HEADING FOR TEST OF JUNE LOW... The daily chart of the Nasdaq Composite shows the technology-dominated index in the midst of a downside correction. The Nasdaq has fallen well below its 200-day moving average. Downside volume (not shown) has also picked up over the last week. The Nasdaq now appears headed for a test of its June low. It's never a good sign when the Nasdaq is leading the rest of the market lower, as it's doing now. Since the mid-September peak, the Nasdaq has fallen 11% versus 8% for the Dow and S&P 500. Another negative sign is that small caps have also lost 11%. That puts both indexes in corrective territory (which is a drop of 10%). The COMPQ/SPX ratio (below chart) has been falling since early September which shows relative weakness in the technology group. The biggest stock in the Nasdaq -- Apple -- has lost 24% since September. Chat 4 shows Apple (AAPL) bearing down on its May intra-day low near 517. That will be an important test for that stock and maybe even the Nasdaq market.
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Chart 3
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Chart 4
EVEN DIVIDEND-PAYING STOCKS ARE SLIPPING... As the year draws to a close, investors usually sell losing stocks to lock in losses for the old year. This year, they seem to selling stocks to lock in winners. That change in behavior is likely caused by the prospect for higher capital gains taxes that are expected to kick in during January. Since Apple was this year's top gainer, tax considerations may account for why it's been sold so hard this month. Dividend-paying stocks are also coming under selling pressure. Chart 5 shows the DJ Dividend iShares (DVY) falling below its 200-day moving average for the first time in a year. A lot of those losses are coming from falling utility shares which account for 31% of the DVY. Chart 6 shows the Utilities SPDR (XLU) tumbling below its 200-day line as well. Dividend-paying stocks normally hold up better during market corrections. The prospect for a big jump in dividend taxes during January (from 15% to 43%), however, makes this group less attractive as a defensive play during the current market correction.
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Chart 5
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Chart 6
TREASURY BONDS JUMP WHILE JUNK FALLS WITH STOCKS... Treasury bonds are one of the few winners during the current stock correction. Chart 7 shows the 20+Year Treasury Bond iShares (TLT) climbing to a new three-month high (green circle). That's because Treasury bonds are negatively correlated with stocks. In other words, they rise when stocks fall. The 60-day Correlation Coefficient (below chart) shows a negative correlation of -.75 with the S&P 500. By contrast, Chart 8 shows the High Yield Corporate Bond iShares (HYG) falling below their September low (yellow circle). Its Correlation Coefficient shows a positive 60-day correlation of +.61 with the S&P 500. That explains why high yield (junk) bonds usually act more like stocks than bonds.
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Chart 7
