A SECULAR BULL WITH NO SIGNS OF DISTRIBUTION -- XRT AND XLY REACH CHANNEL TREND LINES -- REITS SHOW RELATIVE WEAKNESS -- HOME CONSTRUCTION ISHARES EXTENDS ITS STALL -- UTILITIES SPDR STALLS NEAR KEY RETRACEMENT
A SECULAR BULL WITH NO SIGNS OF DISTRIBUTION... Link for today's video. From a purely technical standpoint, it is pretty safe to assume that all time highs occur in secular up trends. With an all time high in April, the S&P 500 joined the Russell 2000, Dow Industrials and Nasdaq. Chart 1 shows the S&P 500 breaking above its 2007 high in April and continuing above 1700 this week. The advance over the last ten months is quite steep (+25%), but there are no signs of a top because we have yet to see a distribution pattern take shape. Notice that the 2007 top formed as the S&P 500 stalled for over 10 months and then broke support with a sharp decline in January 2008. Even the small top in 2011 formed as the index consolidated for six months. Again, there was a clear support break in August 2011 to signal a reversal. This break did not last long as $SPX quickly moved to new highs in early 2012. At present, there is nothing but uptrend on this chart. Sudden tops are relatively rare. More often than not, tops form as a process in which distribution takes place and prices move sideways.
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Chart 1
The indicator window shows the Commodity Channel Index (CCI) being used to confirm the underlying trend. Momentum favors the bulls when positive and the bears when negative. Notice how CCI confirmed the 2008 and 2011 support breaks by turning negative. This momentum oscillator also moved into positive territory in October 2009 and October 2011 to confirm bull runs. Chart 2 shows the S&P 500 Equal Weight Index ($SPXEW) breaking out well before the S&P 500 and leading the market higher this year.
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Chart 2
XRT AND XLY REACH CHANNEL TREND LINES... With a 52-week high last week, the Consumer Discretionary SPDR (XLY) is clearly in a long-term uptrend as well. New highs occur in uptrends, not downtrends. Moreover, new highs are a sign of strength because it means investors have the confidence to buy at higher prices. Even though I see no reason to turn bearish or expect a major top, it is worth nothing that this uptrend is rather mature. Chart 2 shows XLY moving from 32 to 60 over the last 22 months. The pink lines mark corrections or pullbacks along the way. The uptrend resumed each time XLY broke above resistance. Since October 2011, I count at least five consolidations or corrections that ended with breakouts. The most recent breakout occurred in early July and XLY is now trading near the upper trend line of a rising channel. XLY may seem overbought, but it is not backing down and buying pressure remains stronger than selling pressure. Perhaps XLY will simply remain overbought and continue to work its way higher. Broken resistance turns first support in the 58 area. The lower trend line and June low mark key support in the 54-55 area. Chart 4 shows the Retail SPDR (XRT) with similar characteristics.
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Chart 3
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Chart 4
HOME CONSTRUCTION ISHARES EXTENDS ITS STALL... REITs are interest rate sensitive stocks that could be reacting to the recent rise in the 10-year Treasury Yield ($TNX), which is above 2.6%. Mortgage rates and other interest rates are tied to the 10-year Treasury Yield. This is one of the reasons we have also seen relative weakness in the Home Construction iShares (ITB) lately. I am watching ITB closely because this ETF could hold the key to the next market move. ITB remains in corrective mode and has underperformed the market the last few months. A support break in ITB would be negative and could trigger a correction in the broader market. On the other hand, a successful support test and breakout at 24 would end the correction and signal a continuation of the uptrend. Chart 5 shows ITB trading between 21 and 24 the last six weeks. These are the levels to watch for the next directional clue. The indicator window shows the price relative moving lower since early May as ITB underperforms SPY. Chart 6 shows the 10-year Treasury Yield for reference.
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Chart 5
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Chart 6
REITS SHOW RELATIVE WEAKNESS... The stock market continued higher over the last three weeks, but the Real Estate iShares (IYR) did not partake in the advance and declined rather sharply. Chart 7 shows IYR hitting resistance just above the 50% retracement and filling the gap with last week's decline. Even though the ETF is a bit oversold, this breakdown is medium-term bearish and signals a continuation of the prior decline (mid May to mid June). I would mark first resistance at 68.5 and consider this breakdown valid as long as resistance holds. The indicator window shows the price relative (IYR:SPY ratio) breaking below its June low and hitting a 52-week low. IYR is one of the weakest ETFs in the market right now. The StockCharts Technical Rank (SCTR) confirms this with a move below 40 last week.
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Chart 7
UTILITIES SPDR STALLS NEAR KEY RETRACEMENT... Relative weakness in interest rate sensitive issues has been wondering about the Utilities SPDR (XLU). Utilities are sensitive to interest rates because they carry a lot of debt. Higher rates translate into higher interest expenses. Chart 8 shows XLU surging above 39.25 on July 15th and then stalling the last few weeks. The trend since late June is up, but it is possible that the trend since early May is down. This means the bounce over the last 6-7 weeks could be a bear market rally. Support is holding for now and the bulls still get the benefit of the doubt. A move below 38.50, however, would forge a lower high and signal a continuation of the prior decline.
