HOMEBUILDER ETF BOUNCES, BUT REMAINS SHORT OF BREAKOUT -- FINANCE AND CONSUMER DISCRETIONARY SPDRS CHALLENGE THE GAPS -- NASDAQ 100 AD VOLUME LINE HITS NEW HIGH -- ISM NEW ORDERS INDICES POINT TO STRONG ECONOMY
HOMEBUILDER ETF BOUNCES, BUT REMAINS SHORT OF BREAKOUT - USG GAPS UP... Link for today's video. Treasury yields fell after Friday's jobs report and interest rate sensitive stocks got a bounce as utilities, REITs and homebuilders moved higher. In particular, I would like to focus on the Home Construction iShares (ITB) because this group is quite important to the overall economy. Chart 1 shows ITB in a downtrend since late May. The ETF broke neckline support from a head-and-shoulders pattern and remains below this breakout. Downside, however, has been limited since the big bullish engulfing pattern formed in mid August. Notice how ITB fell back and tested this low in the 20.5 area. It is still too early to call for a trend reversal, but I will be watching resistance in the 21.5-22 area. A breakout here would be bullish for ITB and this would be positive for the market overall. Chart 2 shows the Homebuilders SPDR (XHB) in a downtrend since late May and testing the 2013 lows. Chart 3 shows US Gypsum (USG) holding the June low and breaking above resistance with a gap.
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Chart 1
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Chart 2
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Chart 3
FINANCE AND CONSUMER DISCRETIONARY SPDRS CHALLENGE THE GAPS... There were two significant gaps in August. First, stocks gapped lower on August 15th and many ETFs broke short-term support levels. Second, stocks gapped lower on August 27th to signal a continuation of the short-term downtrend, which is considered a correction. With a bounce over the last seven days, some ETFs are starting to fill these gaps as buying pressure reasserts itself. Chart 4 shows the Consumer Discretionary SPDR (XLY) gapping below 58 last week and moving back above 59 today. The late August gap is filled, the wedge trend line broken and XLY is now making a go at the mid August gap. The lows of the last three days mark first support at 58. XLY is also interesting because the price relative (XLY:SPY ratio) formed a small bullish divergence the last three weeks. While XLY moved below its mid August low, the price relative held above this level as XLY showed relative strength. This also occurred in late June.
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Chart 4
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Chart 5 shows the Finance SPDR (XLF) moving above 19.75 this week and trying to fill last week's gap. The ETF broke the early August trend line in the process and a move above 20 would completely fill this gap. The indicator window shows the price relative (XLF:SPY ratio) trending lower since late July. There is not bullish divergence here as XLF continues to underperform the broader market.
NASDAQ 100 AD VOLUME LINE HITS NEW HIGH... I noted strength in the Semiconductor SPDR (XSD) and the FirstTrust Internet ETF (FDN) in Wednesday's market message. These two are important to the technology sector and both moved above their late August highs this week. Strength in the technology sector is carrying over to the Nasdaq 100 ETF (QQQ) and breadth indicators for the Nasdaq 100 ($NDX). Chart 6 shows the Nasdaq 100 AD Line ($NDXADP) breaking above short-term resistance this week and signaling a continuation of the larger uptrend. Also notice that a small bullish divergence formed just before this breakout. A bullish divergence forms when the indicator records a higher low and the underlying index records a lower low. Even though the difference was slight, a higher low in the AD Line indicates that selling pressure is diminishing. This week's breakout signals the return of buying pressure. The indicator window shows QQQ with the August lows marking first support.
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Chart 6
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Chart 7 shows the Nasdaq 100 AD Volume Line ($NDXUDP) breaking out to new highs this week. I prefer to use these "net volume" indicators instead of exchange volume because total volume is not the indicator it once was. Over the years we have seen the rise of dark pools, as well as the rise and fall of high-frequency trading. Getting a good grip on total volume is a real challenge. Net volume indicators, such as Advance-Decline Volume Percent, are not concerned with total volume. Instead, they measure the net result, which is what really drives prices. Buying pressure wins the day when advancing volume outpacing declining volume, while selling pressure prevails when declining volume outpaces advancing volume.
ISM NEW ORDERS INDICES POINT TO STRONG ECONOMY... Even though economic indicators can lag the stock market, there are times when economic indicators and the stock market trend in the same direction. In particular, economic indicators are good for validating the long-term trend for the stock market. They may be wrong for a few months when the market reverses its long-term trend, but they are often correct for several months when the market trends. Among several key economic reports this week, I think the ISM Manufacturing Index and ISM Non-Manufacturing Index sum things up pretty well for the economy. These two are quite easy to interpret: anything above 50 favors economic expansion, while anything below 50 favors contraction. I am not too bothered with the degree of expansion or contraction, simply the overall bias. Does this bias support an uptrend or a downtrend in stocks?
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Chart 8 shows the ISM Manufacturing Index NAPM taking a dip below 50 this summer and then surging above 55 the last two months. The 3-month average (pink) never dipped below 50 and continues to favor an economic expansion. Chart 9 shows the ISM Non-manufacturing Index holding above 52 since mid 2010. With the services side of the economy much bigger than the manufacturing portion, this indicator clearly favors a long-term uptrend in the stock market. Note that the charts below were created with user-defined indices on a StockCharts.com Pro Account
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Chartists looking for a more forward-looking indicator can turn to the new orders component of the ISM indices. Chart 10 shows the ISM Manufacturing New Orders Index surging above 60 for the first time since mid 2011. Chart 11 shows the ISM Non-Manufacturing New Orders Index moving above 50 in the middle of 2009 and holding above this level for some four years. The recent surge above 60 bodes well for the US economy.
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DESPITE JOBS MISS, EMPLOYMENT TRENDS REMAIN POSITIVE... Non-farm Payrolls for August were below expectations, but still expanded at a modest clip and remain more positive than negative. Chart 12 shows monthly Non-farm Payrolls rising to 169,000, after a revised 104,000 in July. The 12-month moving average remains close to 200,000 as the economy continues to add jobs at a steady clip. Chart 13 confirms the positive employment trend as Initial Jobless Claims fell to their lowest level since January 2008. The trend in jobless claims is clearly down and this supports a long-term uptrend in the stock market. A few readings above 360,000 would be enough to upset this downtrend and call for a reassessment.
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