MONEY ROTATES OUT OF MATERIALS AND INTO CONSUMER STAPLES -- DOW MEETS HEAVY SELLING NEAR 14000 AS MARKET ENTERS DOWNSIDE CORRECTION -- RISING DOLLAR PUNISHES COMMODITIES -- DROP IN FOREIGN CURRENCIES SHOWS LOSS OF CONFIDENCE
DEFENSIVE ROTATION ... Sector rotation often gives clues about the mood of the market. This week's sector trends suggest a more defensive mood. Chart 1, for example, shows the Materials SPDR (XLB) tumbling below its 50-day average over the last two days -- and on very heavy volume. The XLB includes a lot of economically-sensitive stocks tied to energy and industrial commodities. The XLB's relative strength line (above chart), which had been leading the market higher into January, has tumbled badly since then. Some of that money has flowed into more defensive categories. Chart 2 shows the Consumer Staples SPDR (XLP) trading higher over the last two days (as the market has fallen). Its relative strength line (above chart) has also turned up. Consumer staples are where money goes when investors are nervous about a downside correction.
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Chart 1
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Chart 2
DOW MEETS RESISTANCE NEAR 14000... A test of important previous peak is always a time for increased caution. That's because corrections often start from the same level. It shouldn't be too much of a surprise then to see the Dow Industrials meeting with resistance near the 14000 level which also marked the peak hit during 2007 (see trendline). The fact that the market has rallied for so long without a pullback also increased the odds that some profit-taking was due. The monthly bars in Chart 3 show that the Dow's major trend is still higher. In order to reverse that uptrend, the Dow would have to fall below its late 2012 low near 12471. There are a lot of potential support levels to support the market long before it gets that low. The daily bars in Chart 4 show the Dow's short-term trend weakening (on rising volume). The 14-day RSI line (above chart) and the daily MACD lines (below chart) have rolled over to the downside as well. So far, however, no serious damage has been done to the Dow's uptrend. The first level of support to watch is the area around the October high (green line). That would also put the Dow within striking distance of its 50-day average (blue line).
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Chart 3
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Chart 4
POWER SHARES QQQ TRUST MAY TEST GAP SUPPORT... Chart 5 overlays Bollinger bands (green lines) on a daily chart of the S&P 500 SPDRs, and shows the SPY falling below the 20-day (dashed) line for the first time this year. That usually signals a drop to the lower band which is the first line of support. Below that, more support is likely along the fourth quarter highs (green line) and the 50-day average (blue arrow). So far, this week's selloff has the look of a normal downside correction. That will remain the case as long as some of those underlying support levels hold. The PowerShares QQQ Trust is in a much weaker condition. Chart 6 shows the QQQ having failed to reach its September high and rolling over badly this week. The QQQ appears headed for a test of the "support gap" formed at the start of the new year (see green box). The bottom of that gap also corresponds to its 200-day moving average. That will be an important test for the QQQ.
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Chart 5
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Chart 6
DOLLAR RALLY PUNISHES COMMODITIES... A strong surge in the PowerShares Bullish Dollar Fund (UUP) this week has caused heavy selling in commodity markets. Chart 7 shows the normal inverse relationship between the UUP and the DB Commodities Tracking Fund (brown line). Heavy selling in commodities (especially economically-sensitive ones like copper and oil) also hints at economic weakness which is bad for stocks. The reason for dollar strength is a virtual collapse in a number of key foreign currencies. Most of the foreign selling had come from the yen. Chart 8, however, shows the British Pound falling to a new 52-week low, while the Canadian Dollar has fallen to the lowest level in six months. That doesn't show much confidence in foreign markets.
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Chart 7
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Chart 8
EURO FALLS BELOW 50-DAY LINE... The dollar is getting its biggest boost from a falling Euro (which makes up 57% of the UUP). Chart 9 shows the Euro falling well below its early 2012 high near 135. That selloff negates the bullish breakout that took place during January. The Euro has also fallen below its 50-day average and is challenging an up trendline drawn under its July/November lows. The direction of the Euro has a bearing the the direction of European stocks. Chart 10 shows the Europe 350 iShares (IEV) falling below its 50-day line as well and trading at the lowest level since the start of the year. The red volume bars show the negative bias over the last month.
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Chart 9
