RETAIL SALES SOFTEN, BUT SURPRISE -- RETAIL SPDR BECOMES OVERBOUGHT AND HITS CHANNEL TREND LINE -- INDUSTRIAL PRODUCTION REMAINS IN LONG-TERM UPTREND -- INDUSTRIALS SPDR SURGES 10% IN FOUR WEEKS -- JOBLESS CLAIMS JUMP TO SEVEN WEEK HIGH
RETAIL SALES SOFTEN, BUT SURPRISE... Link for todays video. Last week we saw several key economic releases with mixed results. Retail sales beat expectations with a small gain. Industrial production came in weaker than expected with a larger decline. Jobless claims surged above 350 for the first time since early April and the second time since mid February. Housing starts plunged, but building permits surged. Despite a truly mixed bag, the overall trends are still favorable for these economic indicators. Admittedly, there is some lag in economic indicators, but they are still helpful when defining the big trend in the stock market. Lets look at these charts individually. Note that StockCharts.com has symbols for Industrial Production ($IPI), Initial Jobless Claims ($$UNEMPCIN) and Housing Starts ($HSNGSTARTS). Using a StockCharts.com Pro account, I created user-defined indices for Retail Sales and Building Permits. Data for these indicators was downloaded from the St. Louis Fed website.
Chart 1 shows Retail Sales falling in March and then rebounding with a small bounce in April. There has definitely been some softening in retail sales over the last two months. In addition, notice that retail sales took dips in May-June 2010 and April-June 2012. There was a tiny negative dip in May 2011. Overall, a spring dip in retail sales seems to be pretty normal. At this point, I would not become too concerned unless we start to see a couple of dips below negative .50%.
Chart 1
RETAIL SPDR BECOMES OVERBOUGHT AND HITS CHANNEL TREND LINE... Chart 2 shows that the Retail SPDR (XRT) is not too bothered with softness in retail sales. The trend has been up since the January breakout and the ETF hit a fresh 52-week high last week. Even so, XRT is looking overextended after a 13% surge from mid April to mid May. We do not need a momentum oscillator to understand that this ETF is looking overbought and ripe for a pullback or corrective period. Also notice that XRT is hitting the upper trend line of a rising channel. Broken resistance and the small consolidation in late April mark first support in the 72-73 area.
(click to view a live version of this chart)
Chart 2
INDUSTRIAL PRODUCTION REMAINS IN LONG-TERM UPTREND... Chart 3 shows Industrial Production ($IPI) steadily climbing since the low in July 2009. There have been a few dips along the way, but only one of these dips lasted more than a month (blue arrow). The other seven dips only lasted one month as industrial production resumed its advance the very next month. The green line is a 12-month moving average and the long-term trend remains up as long as this moving average holds.
(click to view a live version of this chart)
Chart 3
INDUSTRIALS SPDR SURGES 10% IN FOUR WEEKS... Chart 4 shows the Industrials SPDR (XLI) in a clear uptrend since the December breakout. The ETF is up 25% since mid November and up 10% over the last four weeks. This suggests that XLI is both medium-term and short-term overbought. As noted in last weeks commentary, overbought is a term that is often over used. Today, I stand guilty as charged. While I see nothing in the charts to hint at a medium-term or long-term trend reversal, XLI does look ripe for a rest. Broken resistance turns first support in the 41.5-42 area. Chart 5 shows the Equal-Weight Industrials ETF (RGI) breaking out in early May and hitting a new high to confirm broad strength in this sector. Broken resistance turns first support in the 65-66 area. Notice that XLI is heavily weighted towards the big industrial players and the top six holdings account for over 30% of the ETF. As its name suggest, the weightings in RGI are more evenly divided to provide a better picture for the sector as a whole, although I never thought of Dun & Bradstreet (DNB) as a true industrial.
(click to view a live version of this chart)
Chart 4
(click to view a live version of this chart)
Chart 5
JOBLESS CLAIMS JUMP TO SEVEN WEEK HIGH... There is a strong negative correlation between stocks and Initial Jobless Claims ($$UNEMPCIN). In general, stocks fall when jobless claims rise and stocks rise when jobless claims fall. Even though chart 6 shows jobless claims surging to 360,000 last week, the overall trend remains down and this is positive for stocks. Note that the data series is quite volatile so most analysts apply a four week moving average for smoothing. This moving average hit a new low last week and remains below the 52-week moving average. I would not become concerned until the four week moving average moves above 375K.
(click to view a live version of this chart)
Chart 6
SURGE IN BUILDING PERMITS OFFSETS PLUNGE IN HOUSING STARTS... Chart 7 shows Housing Starts ($$HSNGSTARTS) plunging below 900K for the first time this year. This drop is quite drastic, but not enough to reverse the two year uptrend. Notice that the indicator finished right at its 12 month moving average, which is rising. Anther decline and move below 800K would be cause for long-term concern. I am not concerned with this decline because chart 8 shows Building Permits surging above the one million mark for the first time since mid 2008. Even though actual housing starts decline, the plans to start new projects surged and this indicates that housing starts will increase again in the future. The 12-month moving average and 2013 low mark support in the 900K. A break here would reverse the two year uptrend and turn this indicator long-term bearish.
(click to view a live version of this chart)
Chart 7
Chart 8
HOUSING ETFS BECOME OVEREXTENDED AGAIN... The two housing related ETF show no sign of letting up as the Home Construction iShares (ITB) and Homebuilders SPDR (XHB) both hit 52-week highs last week. The same basic analysis applies. ITB and XHB are both in strong uptrends overall, but both have risen sharply in a short period of time. This makes them vulnerable to a corrective period, which could involve a pullback or sideways consolidation. Chart 9 shows ITB surging some 20% the last four-to-five weeks. This advance could extend to the upper channel trend line in the 27 area. Broken resistance turns first support in the 24-24.50 area. Chart 10 shows XHB hitting the upper trend line of a rising channel after a 16% surge off the mid April low. Broken resistance turns first support in the 30.50 area.
(click to view a live version of this chart)
Chart 9
(click to view a live version of this chart)
Chart 10
HONG KONG AND SHANGHAI INDICES BREAK OUT... The Shanghai Composite ($SSEC) surged above resistance at 2250 with a strong move over the last three days. This is a positive development for the country with the second largest economy in the world. Note that the US is the largest economy in the world, Japan is third, Germany is fourth and Brazil is fifth. Chart 11 shows the index with a rather bullish setup. First, notice that $SSEC broke resistance with a big surge in December-January. This surge pushed the index to overbought conditions with strong buying pressure. Remember, overbought is a sign of strength, not weakness. Second, the index retraced 50-61.80% with a falling wedge/channel back to the 2175 area. Both the pattern and retracement amount are typical for corrections within bigger uptrends. Third, the index broke out with a strong move in May. I will now set first support at 2200 and key support at 2150. This breakout is firmly bullish as long as first support holds. Chart 12 shows the Hang Seng Index ($HSI) breakout out in late April and leading the Shanghai Composite.
(click to view a live version of this chart)
Chart 11
(click to view a live version of this chart)
Chart 12
NIKKEI HITS YET ANOTHER 52-WEEK HIGH... The US is the worlds largest economy and the S&P 500 hit a fresh 52-week high last week. Even though the Shanghai Composite and Hang Seng Index are lagging the S&P 500, both broke out and are moving in the right direction. The Nikkei 225 ($NIKK), which represents the third largest economy in the world, has been on a tear since mid November. Chart 13 shows the Nikkei 225 hitting another new high as the Yen ETF (FXY) continues to fall. The Japanese economy has been stagnant for years and this surge could signal a return to growth, which would benefit Asia and the rest of the world. The market seems to like what it sees with Prime Minister Abe and the weak Yen.
(click to view a live version of this chart)
Chart 13
DAX AND CAC LEAD EUROPEAN STOCKS... Chart 14 shows the German DAX Index ($DAX) breaking support at 7500 in mid April, but immediately firming and surging above channel resistance. This breakout signaled a continuation of the bigger uptrend and the DAX hit a new 52-week high last week (and today). Recent weakness in the Euro could be helping the DAX because this is a boost to German exporters. Despite a long-term uptrend, the index is overextended after a 12% surge. Broken resistance turns first support in the 8000-8100 area. Chart 15 shows the French CAC Index ($CAC) following suit with a channel breakout and move above the March highs. Broken resistance in the 3800-3850 area turns first support.
(click to view a live version of this chart)
Chart 14
(click to view a live version of this chart)
Chart 15
BRAZIL AND LATIN AMERICA LAG ... Stocks in the US (North America), Asia and Europe are strong overall and this bodes well for the global economy. Brazil, which is the largest country in South America, is the last (big) piece of the global puzzle. Brazilian and Latin American stocks are lagging the other markets right now and have yet to partake in spring fever. Rather than use the Bovespa ($BVSP), which is heavily weighted towards Petrobras (PBR), I am going to look at the Brazil Small Cap ETF (BRF) for broader picture. Chart 16 shows BRF in a downtrend since mid February. The ETF is underperforming most of the world and did not partake in the May rally. BRF surged in late April and then consolidated the last three weeks. A break above 40.50 would reverse downtrend and put Brazil back in the bullish camp. Chart 17 shows the Latin America 40 ETF (ILF) within a falling channel since early February. Despite this downtrend and brief dip below 42, prices show signs of firmness in the 42-42.5 area, which coincides with the 61.80% retracement. Over the last five weeks, the ETF surged to 44 and retraced 61.80% with a pullback to the 42.6 area. There is a lot of support around 42.50. A surge above 43.2 would be short-term bullish, while a follow through breakout at 44.20 would be medium-term bullish.
(click to view a live version of this chart)
Chart 16
