MARKING FIRST SUPPORT FOR THE S&P 500 -- CONSUMER DISCRETIONARY AND INDUSTRIALS SECTORS HIT NEW HIGHS -- KEY BREADTH INDICATORS CONFIRM INDICES -- NET NEW HIGHS EXPAND AGAIN -- SMALL-CAPS CONTINUE TO SHOW RELATIVE STRENGTH
MARKING FIRST SUPPORT FOR THE S&P 500... Link for today's video. The Labor Department reported that the economy added 162,000 non-farm payrolls in July. This number was below expectations and marked the smallest increase in four months. Stocks futures quickly erased their gains and Treasury bonds bounced after the news. Short-term traders might be interested in these fluctuations, but today's price action is unlikely to change existing trends in the stock and bond markets. As we saw with the Fed day, the combination of thin trading and news can increase volatility. It is probably best to take a step back and focus on the bigger trends at work. Chart 1 shows the S&P 500 hitting a new high above 1700 this week. A rising channel could be taking shape with the upper trend line marking a target in the 1750 area. The June low marks key support at 1550. Notice that the lower trend line of the rising channel extends to this area in October. The indicator window shows the Commodity Channel Index (CCI) turning positive in December and remaining positive throughout 2013. Momentum is bullish as long as CCI hold above the zero line.
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Chart 1
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Chart 2
Chart 2 shows the S&P 500 breaking above its May high and broken resistance turning support in late July. With the move above 1700 this week, the late July low now marks first support to watch. A break below this low would be short-term bearish and argue for a correction within the bigger uptrend. The indicator window shows MACD rolling over the last few days. A move below 15 would clearly break the signal line and also argue for a short-term pullback.
CONSUMER DISCRETIONARY AND INDUSTRIALS SECTORS HIT NEW HIGHS... Chart 3 shows the nine sector SPDRs in CandleGlance format. The indicator windows show the price relatives, which measure performance relative to the SPY. The Healthcare SPDR (XLV), the Consumer Discretionary SPDR (XLY) and the Industrials SPDR (XLI) show upside leadership with new highs this week. Also notice that their price relatives are rising (green arrows). In fact, four of the nine price relatives are rising, which means these sectors are outperforming. Four of the nine are falling. Notice that the Basic Materials SPDR (XLB), Technology SPDR (XLK), Consumer Staples SPDR (XLP) and Energy SPDR (XLE) show relative weakness. The price relative for the Utilities SPDR (XLU) is flat as the sector performs in line. Overall, I would view sector performance as bullish for the market. The four offensive sectors are performing well, especially the consumer discretionary sector. In particular, I would watch the support levels in the XLF, XLI and XLY. A break below these short-term support levels (green lines) could signal the start of a correction.
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Chart 3
KEY BREADTH INDICATORS CONFIRM UNDERLYING STRENGTH... The major stock indices recorded 52-week highs this week and these highs were confirmed by the breadth indicators for the S&P 1500. Note that the S&P 500, S&P MidCap 400, S&P SmallCap 600, Nasdaq 100 and Dow Industrials recorded fresh 52-week highs this week. When the major indices hit 52-week highs, I always check key breadth indicators for confirmation. Failure to confirm suggests that the stock market is not hitting on all cylinders. New highs, on the other hand, reflect broad underlying strength that validates the overall uptrend. I like to use the breadth indicators for the S&P 1500 because this is a broad index that covers large-caps, mid-caps, small-caps and Nasdaq stocks. Over 500 stocks in the S&P 1500 are traded on the Nasdaq.
Chart 4 shows the S&P 1500 AD Line ($SUPADP) turning up this week and moving above the 23-July high. The overall trend is clearly up and breadth is keeping pace with the underlying index (S&P 1500). The indicator window shows the 20-day SMA of Net Advances for the S&P 1500. The green lines mark short-term support levels. Prior support breaks coincided with pullbacks in the S&P 1500. The first two were real short, while the second lasted a few weeks. Chartists can watch the current support line for signs of weakness that may lead to a pullback. Chart 5 shows the S&P 1500 AD Volume Line ($SUPUDP) with similar characteristics.
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Chart 4
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Chart 5
NET NEW HIGHS EXPAND AGAIN... Chart 6 shows the S&P 1500 High-Low Line ($SUPHLP). This is a cumulative measure of Net New Highs (new highs less new lows). The High-Low Line has been above its 10-day EMA, and rising, since November. This long stretch defined the current uptrend and held up during the pullbacks. The indicator window shows Net New Highs surging above 25% again this week. A downtrend is impossible with some many stocks hitting 52-week highs. The trouble does not start unless Net New Highs dip below -2%, which would signal that new lows are expanding.
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Chart 6
SMALL-CAPS CONTINUE TO SHOW RELATIVE STRENGTH ... Two measures confirm that small-caps are leading large-caps and this is positive for the stock market. Note that small-caps are more domestic-oriented with less international exposure. In addition, small-caps typically have higher betas and are riskier than large-caps. Relative strength in small-caps suggests two things. First, the US economy is performing well. Second, the appetite for risk is strong. Chart 7 shows the Russell 2000 ($RUT) relative to the S&P 100 ($OEX) using a ratio chart ($RUT:$OEX). This ratio rises when the Russell 2000 (small-caps) outperforms the S&P 100 (large-caps). Notice that the ratio bottomed in April and broke out in May. It has been rising the last three months and remains in an uptrend. The blue trend line defines this uptrend and a break below 1.37 would signal relative weakness in small-caps.
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Chart 7
Chart 8 shows the S&P 500 Equal-Weight ETF (RSP) relative to the S&P 500 ETF (SPY). Believe it or not, there are more small and mid-caps in the S&P 500 than large-caps. In fact, the top 100 stocks account for around 60% of the S&P 500 ETF (SPY). That leaves less than 40% for the other 400 stocks. Turning back to the chart, notice that relative strength breakdowns preceded deep corrections in August 2011 and May 2012. Looking at current conditions, the RSP:SPY ratio moved to a new high in early August. This means RSP is leading SPY. In other words, the bottom 400 stocks are leading the top 100. The June low mark support. A break here would signal the start of a downswing and relative weakness in RSP.
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Chart 8
JOBLESS CLAIMS AND NAPM SUPPORT BULL MARKET... It was a busy week for economic indicators, and the majority of indicators have been supported of the current bull market. John Murphy noted that the ISM Index surged to a two year high and jobless claims reached their lowest level in over five years. Chart 9 shows the ISM Manufacturing Index moving above 54 for the first time since the summer of 2011. This indicator fluctuates above and below 50. Anything above 50 favors an economic expansion. Anything below 50 points to a contraction. There was a scare two months ago when the indicator dipped below 50, but it recovered immediately with a move to 50.6 in June and then a surged to 55.40 in July. Except for two brief dips, this indicator has been above 50 since August 2009. Chartists can argue about the overall level and compare current levels to the 2010-2011 highs, but I would simply focus on the cup. Is it half full or half empty? Clearly, America's manufacturing cup is half full right now.
Chart 9
Chart 10 shows initial jobless claims reaching 326,000, which is the lowest level since January 2008. Believe it or not, jobless claims are at pre-crisis levels (2007). More importantly, the trend is clearly down and this supports the uptrend in the S&P 500. Jobless claims have been falling since the second half of 2009. Initial jobless claims also tend to lead non-farm payrolls. Even though non-farm payroll missed expectations in July, they remain positive and the economy is still adding jobs. I would not become concerned unless we start to see initial jobless claims exceed 365,000 (red line). This is a pretty volatile series so analysts often apply a four week moving average to smooth the data. Note that these two charts were generated from user-defined indices in a StockCharts.com Pro account.
Chart 10
