RELATIVE STRENGTH IN OFFENSIVE SECTORS SUPPORTS UPTREND -- BREADTH INDICATORS CONFIRM NEW HIGHS IN S&P 1500 -- SPY HITS CHANNEL WITH FIFTH WAVE -- THREE SIMPLE MOMENTUM METRICS TO DEFINE THE TREND -- S&P 500 ETF ROCKS IN A RELATIVE WORLD
RELATIVE STRENGTH IN OFFENSIVE SECTORS SUPPORTS UPTREND... Link for todays video. There were concerns a month ago when the defensive sectors were leading the market, but this changed as the offensive sectors took control over the past month. PerfChart 1 shows the percentage change for the nine sector SPDRs from mid March to mid April. Notice that the three defensive sectors were up over 5% during this period. In contrast, three of the four offensive sectors were down. The Consumer Discretionary SPDR (XLY) gained, but this gain was a paltry .80%.
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Chart 1
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Chart 2
Perfchart 2 shows these same nine sectors from mid April to mid May. Notice that the four offensive sectors are up more than 5% and outperforming the defensive sectors. Relative strength in these offensive sectors reflects a strong appetite for risk and this is healthy for the market. The Utilities SPDR (XLU) is actually down over the past month, while the Consumer Staples SPDR (XLP) and Healthcare SPDR (XLV) are up less than three percent. The Basic Materials SPDR (XLB) and Energy SPDR (XLE) are performing well with gains in excess of 6%.
BREADTH INDICATORS CONFIRM NEW HIGHS IN S&P 1500... There are simply no signs of weakness in the breadth indicators for the S&P 1500, which hit a new high this past week. Chart 3 shows the S&P 1500 AD Line ($SUPADP) breaking out at the end of April and hitting a new high again this week. This new high reflects broad participation in the current advance. Chart 4 shows the S&P 1500 AD Volume Line ($SUPUDP) hitting a new high as the volume in advancing stocks outpaces the volume in declining stocks. We can are about overall volume levels, but it is clear that buying pressure is stronger than selling pressure right now. Chart 5 shows the S&P 1500 High-Low Line ($SUPHLP) extending its advance and showing no signs of weakness. High-Low Percent moved above 25% for the first time this year.
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Chart 3
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Chart 4
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Chart 5
SPY HITS CHANNEL WITH FIFTH WAVE... Even though there are no signs of weakness in the current up trends, I will open Pandoras box with a little Elliott Wave on chart 6. This is for informational purposes only! I am a trend follower, not a top/bottom picker so do not take this as a bearish assessment. Chart 1 shows the S&P 500 ETF (SPY) within a clear uptrend since November. Using some simple wave counts, a clear five wave structure formed from November to May. Also notice that wave three breaks down into a five wave advance. With the fifth wave surge above 165, SPY hit the upper trend line of a rising channel. Notice that this channel is based on the trend line extending from the wave two and wave four lows. Ideally, it would run parallel from the peak of wave one or three, and this trend line could be used for upside projections. In any case, SPY hitting the upper trend line indicates that the ETF is getting overextended and ripe for a correction. Also note that SPY is up over 7% in the last four weeks. Should a pullback materialize, the lower trend line and broken resistance converge to mark support in the 160 area in early June.
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Chart 6
THREE SIMPLE MOMENTUM METRICS TO DEFINE THE TREND... There are two things we should have learned over the last six months. First, the term overbought can be over used. Second, overbought is a sign of strength, not weakness. Having said that, I will admit that the S&P 500 ETF (SPY) is short-term overbought after a 7% surge in four weeks. While this increases the chances of a correction, it does not undermine the overall uptrend. Strong buying pressure is required to produce overbought readings. Chart 7 shows RSI above 70, MACD at its highest level of the year and the Aroon Oscillator at 95. Despite these relatively high readings, notice how all three held their bullish ranges since December. RSI broke above 60 in early December and the 40-50 zone held in late December, late February and mid April. MACD turned positive in early December and remains positive. The Aroon Oscillator broke above +50 in early December and has yet to break below -50 to negate this signal. Even though some consider momentum oscillators redundant because they measure the same thing, I have found that three oscillators can be used to get a consensus or a majority. In other words, look for all three to trigger for a confirmed signal.
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Chart 7
S&P 500 ETF ROCKS IN A RELATIVE WORLD... In the relative world of investing, the S&P 500 ETF is outperforming most other asset classes. Investment managers looking for the best returns will not doubt be drawn to the best relative performers. Chartists can compare the performance of two securities by creating a ratio chart. For example, the symbol SPY:DBC would show the performance of the S&P 500 ETF relative to the Commodity Index Fund (DBC). SPY is outperforming when this ratio rises and underperforming when this ratio falls. Chart 8 shows this ratio breaking out in December and surging throughout 2013. SPY is seriously outperforming DBC.
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Chart 8
STOCKS STILL OUTPERFORMING TREASURIES... Chartists can use the SPY:TLT ratio to compare the performance of SPY relative to the 20+ Year T-Bond ETF (TLT). The relationship between stocks and Treasuries is quite important because these two have been negatively correlated for most of the last six years. Treasuries are viewed as safe-haven assets, while stocks are viewed as risky assets. Money moves into stocks during good times and Treasuries during bad times. In addition, the Fed is doing its best to push money into riskier assets and out of safe-havens. Chart 9 show the SPY:TLT ratio rising since June 2012 with two pullbacks along the way (Sep-Nov 2012 and Mar-Apr 2013). There was some concern when stocks underperformed from mid March to mid April, but the ratio did not break below the February low. Instead, the ratio turned back up and broke the March trend line with a surge in May. The indicator window shows MACD(21,63,1) turning positive in mid December and remaining positive. Stocks have the edge as long as this momentum oscillator holds above the zero line.
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Chart 9
SPY OUTPERFORMS GOLD AND EMERGING MARKETS... Chart 10 shows the SPY:GLD ratio breaking out in December and surging throughout 2013. These two have been moving in opposite directions the entire year. In fact, stocks have been outperforming gold since August 2011.
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Chart 10
Chart 11 shows the SPY:EEM ratio breaking out in January and surging this year. The stodgy old S&P 500 ETF is even outperforming the Emerging Markets iShares (EEM).
