S&P 500 REVERSES AT CHANNEL TREND LINE -- MAY IS ALMOST OVER, BUT SIX MONTH CYCLE IS STILL HERE -- RETAILERS LEAD CONSUMER DISCRETIONARY SECTOR LOWER -- INTEREST RATE SENSITIVE ETFS GET PUMMELED -- APPETITE FOR RISK WANES AS MID-CAPS START TO LAG
S&P 500 REVERSES AT CHANNEL TREND LINE... Link for today's video. The S&P 500 is overbought by most metrics and remains ripe for a correction as the month of May draws to a close. Chart 1 shows the index surging to the upper trend line of a rising channel. While this trend line does not act as "hard" resistance, the move to this trend line indicates that the index has reached one of its upside targets and is due for a rest period. Also notice that the index is up over 20% from its mid November low and up over 10% from its late February low. We do not need momentum oscillators to understand that the index has come a long way without a pullback. There is a consolidation around the 1550 area from early March to mid April. This is the first area to watch for support on any pullback.
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Chart 1
Even though May is almost overall, chartists should not forget that the six-month cycle is still negative for stocks. The bullish period runs from November to April and the bearish period from May to October. Cycles are tricky because they are sometimes early and sometimes late. This is why we need to use other aspects of technical analysis for timing. I have been using MACD and its signal line the last few months. Basically, a bearish cross during the May to October period carries more weight than a bearish cross during the November to April period. Notice that MACD has been above its signal line for 21 weeks and remains bullish. Chart 2 shows the S&P 500 ETF (SPY) with first support marked in the 155 area.
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Chart 2
APPAREL RETAILERS WEIGH ON RETAIL SPDR... Chart 3 shows the Retail SPDR (XRT) moving back below its channel trend line with a decline over the last three days. I featured XRT on Monday and noted that the ETF was overextended and ripe for a correction. This correction could be unfolding with Wednesdays reversal day and Further weakness today. Keep in mind that I am not calling for a major trend reversal here. The ETF was simply overbought after a 10+ percent surge that exceeded the channel trend line. A correction back towards the lower trend line would extend to the mid 70s. There is also potential support in the 71-74 area from broken resistance. Chart 4 shows Abercrombie & Fitch (ANF) loosing some Dollar weight with a break below 50. Chart 5 shows Aeropostale (ARO) gapping down to form an island reversal over the last two weeks.
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Chart 3
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Chart 4
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Chart 5
CONSUMER DISCRETIONARY SPDR LEADS SECTORS LOWER... A number of key industry groups feature in the Consumer Discretionary SPDR (XLY) and chartists should watch this economically sensitive sector closely for clues on the broader market. Note that broadcasters, car manufacturers, homebuilders, retailers and restaurants are part of this sector. Chart 6 shows XLY in a clear uptrend since mid November. After a surge above 58 early Wednesday, the ETF reversed course during the day and closed near 57. This is a reversal day and we are seeing some follow through on Friday. These short-term declines are not enough to affect the overall uptrend, but we could see further weakness short-term as the ETF works off overbought conditions. Broken resistance and the November trend line mark first support in the mid 50s. Chart 7 shows the Equal-weight Consumer discretionary ETF (RCD) with support in the mid 60s.
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Chart 6
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Chart 7
INTEREST RATE SENSITIVE STOCKS BEAR BRUNT OF SELLING PRESSURE... High yielding stocks came under intense selling pressure this month. Even though the end of quantitative easing is by no means definitive, there is certainly a lot of chatter and these prospects are weighing on interestrate sensitive issues. Chart 8 shows the Utilities SPDR (XLU) falling around 6% this month with a decline that started on May 1st. XLU broke short-term support this week to signal a continuation of the first leg lower. Broken resistance and the 50-61.80% retracement zone mark the next major support zone. The indicator window shows the price relative moving to a new low for the year as XLU shows serious relative weakness.
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Chart 8
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Chart 9
Chart 9 shows the Real Estate iShares (IYR) plunging below the November trend line over the last three days. The price relative also fell and hit its lowest level of 2013. Admittedly, this decline is already short-term overdone and the bigger trend remains up. Also notice that the mid April low marks potential support around 71.
SMALL-CAPS AND MID-CAPS START UNDERPERFORMING... While there are no signs of a major top in the stock market, relative weakness in small-caps and mid-caps is a concern, especially with the market ripe for a correction. Chart 10 shows the S&P MidCap 400 SPDR (MDY) racing to a new high in May with a surge above 220. The indicator window shows the price relative advancing from October to March as MDY outperformed the S&P 500 ETF (SPY). Even though MDY hit a new high in May, the price relative did not confirm as MDY started underperforming SPY the last two months. Relative weakness in mid-caps suggests that the appetite for risk is waning and this could foreshadow a corrective period for stocks. Chart 11 shows the Russell 2000 ETF (IWM) with the $RUT:$OEX ratio in the indicator window.
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Chart 10
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Chart 11
AD LINE AND AD VOLUME LINE HIT NEW HIGHS... There are no major signs of weakness in the breadth indicators as the S&P 1500 AD Line ($SUPADP) and S&P 1500 AD Volume Line ($SUPUDP) hit new highs at the beginning of the week. Both dropped with Wednesdays decline, but remain in uptrends overall. The worst we can say about these indicators is that they are overextended and ripe for a rest. We have yet to see bearish divergences form that would suggest underlying weakness in the market. Chart 12 shows the AD Line trading well above its rising 21-day EMA. Chart 13 shows the AD Volume Line with a sharp surge from mid April to mid May. Chart 14 shows the S&P 1500 High-Low Line ($SUPHLP) hitting a new high and Net New Highs bouncing around the 20% level.
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Chart 12
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Chart 13
