HALF OF MARKET IS IN A CORRECTION -- THAT'S WHAT NEEDS TO SHOW UPSIDE IMPROVEMENT -- THE GOOD NEWS IS THAT THE WEAKEST SECTORS -- ENERGY, MATERIAL, INDUSTRIALS AND TECHNOLOGY -- ARE BOUNCING OFF CHART SUPPORT
HALF OF NYSE STOCKS ARE BELOW 50-DAY AVERAGE... The stock market continues to display remarkable resilience in the face of short-term warning signals of a possible downside correction. Although a number of short-term technical indicators have weakened, the market has kept rising. The resulting confusion may be the result of us looking at it the wrong way. The fact is slightly more than half of NYSE stocks have entered downside corrections. The reason their downturn hasn't been reflected in the major market indexes is continuing strength in defensive market groups like staples, healthcare, and utilities. Continuing gains in those three groups have prevented market indexes from turning down. That's enough to confuse any market watcher. Chart 1 plots the % of NYSE stocks trading above their 50-day average. The blue line peaked near 90% during January and has since dropped to as low as 45%. That puts at least half of NYSE stocks in downside corrections, and may be a truer reflection of what the stock market is actually doing. [The % of NYSE stocks above their 200-day average is still a relatively high 73%, which shows underlying strength in most stocks].
(click to view a live version of this chart)
Chart 1
WHERE THE CORRECTION HAS BEEN... Chart 2 plots the four weakest market sectors versus the S&P 500 (black line) since the start of the year. The four weakest are materials, technology, industrials, and energy. Over the last month, those four groups lost ground on an absolute basis while the S&P 500 has been basically flat. That's where the stock market weakness lies, and where the market's downside correction has taken place. That being the case, it may be instructive to pay more attention to those market laggards from a charting standpoint.
Chart 2
COMMODITY EFTS FIND CHART SUPPORT... Commodity related sectors have been among the market's hardest hit during April. Chart 3 shows the Energy SPDR (XLE) undercutting its February low during April and trading well below its 50-day average. The good news is that the XLE is bouncing off a rising trendline drawn under its July/November lows. It's also finding support near its 200-day average (red arrow). Chart 4 shows the Materials SPDR (XLB) bouncing off potential chart support at its February low. It too is finding support above its 200-day line. Since energy and materials have weighed on the market over the last month, any new signs of strength from those support levels should be a positive factor.
(click to view a live version of this chart)
Chart 3
(click to view a live version of this chart)
Chart 4
INDUSTRIALS AND TECHNOLOGY ALSO BOUNCE OFF SUPPORT... Economically-sensitive industrial stocks have also been underachievers. Chart 5, however, shows the Industrials SPDR (XLI) attempting to bounce off potential chart support at its February low. That's obviously a very important support level. The trend since February is sideways. The XLI needs to stay above its February low to prevent that trend from turning down. The solid line below Chart 5 is the XLI/SPX relative strength ratio. That line also needs to start trending higher to show that industrial stocks are supporting the market, instead of weighing on it. Chart 6 shows the Technology SPDR (XLK) also dropping during April. There again, however, the XLK is starting to bounce off potential chart support drawn under its first quarter lows (horizontal line). The XLK has been an underperformer all year (as shown by the falling XLK/SPX ratio). That's also been a drag on the rest of the market. It's pretty hard for the rest of the market to move substantially higher without more help from the technology group. The preceding four charts show where the market weakness has been concentrated. The good news is that all four are attempting to stabilize near potential support levels. That helps explain the ability of major stock indexes to bounce off their initial support levels over the last couple of days.
(click to view a live version of this chart)
Chart 5
(click to view a live version of this chart)
Chart 6
DEFENSIVE STOCKS LEAD CYCLICALS... Chart 7 is designed to show how unusual the current rally has been. The green line represents the Morgan Stanley Cyclical Index (CYC) which includes 30 stocks in economically-sensitive groups like autos, metals, paper, machinery, chemicals and transports. The red line is the MS Consumer Index (CMR), which includes stocks in beverages, food, pharmaceuticals, tobacco and personal products. The chart covers the last leg of the market uptrend that started last November. Normally, the cyclicals (green line) lead during market advance, as they did from November to March. Over the last month, however, The defensive CMR index has been leading the CYC (yellow circle). That's unusual in an ongoing uptrend, and is usually consistent with a market pullback or consolidation. Chart 8 shows how unusual that is. The black line plots a ratio of the CYC divided by the CMR since the start of 2010. You'll notice that the CYC normally leads the CMR (a rising ratio) when the S&P 500 is rising (see up arrows). Since the start of 2013, however, the opposite has been the case (gray circle). The falling ratio this year shows defensive stocks leading economically-sensitive ones. That suggests a couple of things. The fact that cyclical stocks are lagging shows less confidence in the economy. The fact that defensive consumer stocks are leading suggests that the market rally is being driven more by global quantitative easing (most recently in Japan), as investors are being forced out of bonds with record low yields into dividend paying stocks. Money flows into dividend paying stocks may help keep the rally going. But a healthy market uptrend needs more help from stocks tied to the economy.
(click to view a live version of this chart)
Chart 7
(click to view a live version of this chart)
Chart 8
CYCLICALS INDEX REMAINS ABOVE FEBRUARY LOW... The good news is that the recent pullback in the MS Cyclicals Index (CYC) has been relatively small (-6.7%). In addition, it's still above chart support along its late February low and is starting to bounce. That shows very little damage having been done to the uptrend in the group of economically-sensitive stocks. A move back above its 50-day average would be an encouraging sign. A move to new highs would be even better.
