HIGH-BETA STOCKS STILL SHOW RELATIVE WEAKNESS -- RUSSELL 2000 HEADS TOWARD RETRACEMENT ZONE -- NASDAQ RATE-OF-CHANGE HITS OVERSOLD ZONE -- KEY SECTOR BULLISH PERCENT INDICES BREAK 50% -- RSI FOR TECHNOLOGY BPI TURNS BEARISH
HIGH-BETA STOCKS STILL SHOW RELATIVE WEAKNESS... Link for todays video. The Russell 2000 ($RUT) and Nasdaq remain laggards and continue to undermine the broader market. In general, the Russell 2000 represents small-cap stocks and the Nasdaq represents technology stocks. Smaller companies are more dependent on the domestic economy and tend to be less diversified than large companies. Technology stocks represent high growth and high risk. Small-caps and technology stocks usually have higher betas, which defines relative risk. Beta measures the correlated volatility of a security relative to the volatility of the benchmark index. High beta stocks are more volatile than the benchmark. Low beta stocks are less volatile than the benchmark. The markets risk appetite is weak when these high-beta names underperform (risk-off). Conversely, the markets risk appetite is strong when these names outperform (risk-on). PerfChart 1 shows the two-month performance of seven stock indices relative to the S&P 500. Notice that the NY Composite ($NYA) is the only one outperforming the S&P 500. The S&P SmallCap 600, Russell 2000 and Nasdaq are underperforming. There is clearly little appetite for risk right now.
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Chart 1
RUSSELL 2000 HEADS TOWARD RETRACEMENT ZONE ... Chart 2 shows the Russell 2000 with the 9-week rate-of-change in the indicator window. On the price chart, the index failed at resistance for the third time since April 2011 and declined sharply the last nine weeks. $RUT is now down around 11% from its mid September highs. Even though this decline seems drastic, note that the index also fell 11% in April-May. Price chart support, however, is set lower in the 725-750 area, which suggests further room to fall. Broken resistance, the June low and the 50-61.80% retracement zone mark potential support here. At this point, a lot of technical damage has been done. This means a repair period may be in order before a meaningful bounce. A repair period could involve a consolidation to establish support and stabilize the index.
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Chart 2
NASDAQ RATE-OF-CHANGE HITS OVERSOLD ZONE... Chart 3 shows the Nasdaq breaking down with a move below 3000. After a sharp move to the 3000 area in October, the index stalled with a small two-week consolidation and then continued lower the last two weeks. The next support zone resides in the 2700 area. Broken resistance, the summer low and the 50-61.80% retracement zone converge to mark potential support here. The indicator window shows the 9-week rate-of-change indicator moving below 10% for the second time this year and at least the fourth time in three years. Prior corrections ended after the indicator moved into this zone, which marks an oversold condition. As with the Russell 2000 above, a healing period is likely needed to produce a sustainable bounce.
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Chart 3
KEY SECTOR BULLISH PERCENT INDICES BREAK 50%... StockCharts.com maintains Bullish Percent Indices for the nine sectors and various broad indices. The Bullish Percent Index shows the percentage of stocks on a P&F buy signal, which is the basic Double Top Breakout. A stock is on a P&F buy signal when the most recent X-Column exceeds the high of the prior X-Column. Otherwise, it is on a P&F sell signal. There is no ambiguity. A stock is either on a P&F buy signal or a P&F sell signal. The Bullish Percent Indices act as breadth indicators that measure internal strength (or weakness as the case may be). The image below shows a list taken from the end-of-day Market Summary page. Notice that the Nasdaq BPI ($BPCOMPQ), the Nasdaq 100 BPI ($BPNDX) and the Technology BPI ($BPINFO) are below 50%. This is testament to the relative weakness we are seeing in the technology sector.
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Chart 4
RSI FOR TECHNOLOGY BPI TURNS BEARISH... Chartists can also plot the Bullish Percent Indices and apply indicators to generate signals. BPIs sometimes form clear support and resistance levels that can be used to trigger signals. Chartists can draw trend lines to identify reversals or even use momentum oscillators for signals. The following charts shows the sector BPIs and the underlying ETF in the main window, and 23-day RSI in the indicator window. 23 days represents about a month and this indicator is applied to the Bullish Percent Index. A move above 60 is bullish for BPI momentum, while a move below 40 is bearish for BPI momentum. I could use crosses above/below 50, but there are too many whipsaws. Therefore, I applied a 10-point buffer to reduce these whipsaws and further quantify the signals.
Chart 5 shows the Technology BPI ($BPINFO) turning bearish towards the end of October. Notice that the indicator broke support near 63 on the main chart and RSI moved below 40. I can now draw a trend line extending down from the September high. A clear downtrend is present as long as this trend line holds and RSI remains below 60.
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Chart 5
Chart 6 shows the Consumer Discretionary BPI ($BPDISC) breaking down in October as well. The indicator peaked in mid September and formed a series of lower lows and lower highs before plunging the last two weeks. RSI moved below 40 in the latter part of October to confirm weakness. No signs of strength here.
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Chart 6
Chart 7 shows the Finance BPI ($BPFINA) breaking down in November. This indicator held up longer than the Technology BPI and the Consumer Discretionary BPI. Nevertheless, it joined the bearish ranks this week as selling pressure expanded in the stock market.
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Chart 7
Chart 8 shows the Industrials BPI ($BPINDY) also breaking down this month. The Industrials BPI also held up in October, but succumbed to broad market pressure in November. The indicator broke support from the October low and RSI moved below 40 for the first time since June. These four sectors represent the offensive sectors and their Bullish Percent Indices are clearly in bear mode.
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Chart 8
STAPLES AND HEALTHCARE SECTORS HOLD UP THE BEST... The Healthcare SPDR (XLV) was not immune to market weakness over the last two months, but the sector ETF held up better than the other eight sectors. On a relative basis, it is the best performing sector since mid September, which is when the current decline began. All sectors are down over this period. XLV is just down the least. PerfChart 9 confirms relative strength versus the S&P 500. XLV (purple) sports the highest bar among the nine sector SPDRs. The Consumer Staples SPDR (XLP) and the Finance SPDR (XLF) were the next best, while the Technology SPDR (XLK) performed the worst.
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Chart 9
HEALTHCARE SPDR HITS SUPPORT ZONE... Chart 10 shows the Healthcare SPDR declining the last two months with a falling channel. This channel defines the downtrend and prices need to break out of the channel to reverse the downtrend. Even though we have yet to see a reversal, there are signs of support as the ETF nears the August consolidation and the 50% retracement. The indicator window shows the Commodity Channel Index (CCI) moving lower since early September. A break above the red trend line and a move into positive territory would signal a bullish reversal in momentum. Look for confirmation on the price chart with a channel breakout.
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Chart 10
After all the talk of Bullish Percent Indices, you are probably wondering whats up with the Healthcare BPI ($BPHEAL). Well, selling pressure of the last two months has taken its toll. The BPI broke down in November and RSI moved below 40. This means the BPI is bearish for the healthcare sector. At the very last, RSI for the Healthcare BPI needs to break 60 to put this indicator back on the bullish track.
