DIA AND SPY LARGELY IGNORE THE NEGATIVES (SO FAR) -- RELATIVE WEAKNESS IN RSP FORESHADOWED LAST TWO CORRECTIONS -- OIL BREAKS KEY TREND LINE AND TESTS MARCH LOW -- XLE AND XES LEAD MARKET LOWER -- CHARTING THE DIPS IN NON-FARM PAYROLLS AND RETAIL SALES
DIA AND SPY LARGELY IGNORE THE NEGATIVES (SO FAR)... Link for todays video. The S&P 500 ETF (SPY) and Dow Industrials SPDR (DIA) are within spitting distance of their highs, but the list of stock market negatives simply grows. Weakness in oil can be added to this list after a sharp decline in April. I will cover the oil charts in the next section. Recent negatives include: the February breakdown in copper, the bearish six month cycle that starts in May, leadership from the defensive sectors this year, relative weakness in small-caps this month and the early April breakout/surge in Treasuries. Despite these negatives, we have yet to see sustained selling pressure in stocks and the major index ETFs have yet to break down. The ability to hold up in the face of negatives is actually positive and shows resilience. Nevertheless, the market still looks quite vulnerable to a correction that could test the mid March lows. Chart 1 shows the S&P 500 ETF surging above 158 last week and then falling back below this level on Monday. The Raff Regression Channel and lows extending back to mid March mark key support. A break below these lows would clearly reverse the uptrend. The indicator window shows the Vortex indicators in bull mode with +VI remaining above VI. Chart 2 shows DIA with support in the 142-143 area and the directional movement indicators in bull mode.
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Chart 1
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Chart 2
RELATIVE WEAKNESS IN RSP FORESHADOWED LAST TWO CORRECTIONS... Small-caps are bearing the brunt of todays selling pressure with the Russell 2000 ETF (IWM) leading the way lower. Today I would use the S&P 500 Equal-Weight ETF (RSP) and the S&P 500 ETF (SPY) to compare small and mid-cap performance against large-cap performance. SPY is a market-cap weighted index that favors large-caps. The 50 biggest stocks account for around 49% of the ETF. RSP is an equal-weight index of the same 500 stocks. RSP favors the smaller companies in the S&P 500 because it represents the bottom 450 stocks, which account for the other 51% of the ETF. Chart 3 shows RSP since October 2011 and the RSP:SPY ratio in the indicator window. This price relative measures the performance of RSP relative to SPY. In general, stocks perform well when RSP outperforms or performs in line with SPY. Stocks suffer when RSP starts to underperform SPY and the price relative breaks down. In fact, breakdowns in this ratio foreshadowed the last two 10% plus corrections. The RSP:SPY ratio broke support in July 2011 and RSP subsequently broke down in early August. The RSP:SPY ratio broke support in early April 2012 and RSP broke down in May. As the chart now stands, the ratio has flattened and has yet to break support from the February-April lows. A break below these lows would show relative weakness in RSP and this could further increase the chances of a correction in the stock market.
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Chart 3
OIL BREAKS KEY TREND LINE AND TESTS MARCH LOW ... Spot Light Crude ($WTIC) fell sharply this month and is on the verge of breaking a long-term support level. Chart 4 shows weekly bars over the last two years. Oil formed a lower high early this month and broke the triangle trend line with a move below 90 today. This means oil is testing support from the March low, a break of which would be bearish and target a move to the low 80s, or perhaps even lower. Chart 5 shows the US Oil Fund (USO) breaking support with a sharp move lower on Friday and continuing lower on Monday. The November-December lows mark the next support zone in the 31-31.25 area. The indicator window shows MACD turning down and moving into negative territory.
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Chart 4
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Chart 5
XLE AND XES LEAD MARKET LOWER... Weakness in oil is weighing on oil-related stocks as the Energy SPDR (XLE) and the Oil & Gas Equipment/Services SPDR (XES) lead the market lower on Monday. Chart 6 shows XLE surging to 79 in mid February and hitting resistance in the 79-80 area the last four weeks. With a plunge below 77 today, XLE is testing support from the early April low. The indicator window shows the price relative (XLE:SPY ratio) breaking support and forging a 52-week low this month. Relative weakness increases the chances of a support break and trend reversal on the price chart.
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Chart 6
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Chart 7
Chart 7 shows the Oil & Gas Equipment/Services SPDR peaking in mid February and forming a series of lower highs in March and April. This is a downtrend with the next support zone in the 35 area. The indicator window shows the price relative (XES:SPY ratio) zigzagging lower as XES underperforms the market since mid February.
CHARTING THE DIPS IN NON-FARM PAYROLLS AND RETAIL SALES... Even though economic statistics are backward looking, we can chart some key indicators to get an idea of their trend and relative levels. Chart 8 shows Non-farm Payrolls (EMSPAY) turning positive at the end of 2010 and remaining positive for over 2 years. The 12-month average is 159K, but the March numbers fell to 88K, which is well below average. Non-farm payrolls also dipped below 100K in July 2011 and June 2012. These dips did not last long as non-farm payrolls rebounded the following months. While the most recent 88K reading is a concern, it is just one month and does not represent a trend just yet. A second weak reading, however, could further spook the stock market and rally the bond market. (* This data was uploaded using a user-defined index, which is available to Extra and Pro members at StockCharts.com).
Chart 8
Chart 9 shows Retail and Food Service Sales (RSAFS) dipping to their lowest level since June 2012. Retail spending is important because it accounts for 2/3 of GDP. Even though one negative month does not make a trend, there is something about spring because retail sales turned negative in May-June 2010, May-August 2011 and April 2012. Also notice that the S&P 500 dipped in May-June 2010, April-June 2011 and April-May 2012. (* This data was uploaded using a user-defined index, which is available to Extra and Pro members at StockCharts.com).
Chart 9
HONG KONG AND SHANGHAI HEAD TOWARDS KEY RETRACEMENTS... Chinese stocks came under selling pressure because recent economic reports indicate that economic growth is slowing in this key Asian market. Analysts were expected 8% first quarter growth, but the official numbers showed growth at just 7.7%, which is still pretty darn good. Nevertheless, the markets are all about expectations. Even though the miss is not that big, the failure to meet expectations means traders must re-price or adjust to revised expectations. Chart 10 shows the Hang Seng Index ($HSI) peaking in late January and felling below 21,000 today. This is a new low for the move and simply extends the downtrend. The 50% retracement line and November low mark first support in the 21K area. The 61.80% retracement line and broken resistance mark second support in the 20.3K area. Support levels are just potential right now. Resistance is more important because it defines the current downtrend. Look for a break above 22530 to reverse the slide. Chart 11 shows the Shanghai Composite ($SSEC) breaking to new lows for 2013. The 61.80% retracement and broken resistance level mark first support in the 2150 area. Resistance is set at 2300.
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Chart 10
