FINANCIALS AND INDUSTRIALS LEAD MARKET HIGHER -- REGIONAL BANK SPDR REMAINS BELOW SUPPORT BREAK -- COPPER ETF FAILS TO PARTAKE IN SEPTEMBER SURGE -- YIELD CURVE CONTINUES TO STEEPEN -- RSI FOR TLT TRACES OUT BULLISH FAILURE SWING
FINANCIALS AND INDUSTRIALS LEAD MARKET HIGHER... Link for today's video. The Finance SPDR (XLF), the Industrials SPDR (XLI) and the Basic Materials SPDR (XLB) are leading the stock market sectors with the biggest gains on Monday. Also note that XLI, XLB, the Consumer Discretionary SPDR (XLY), the Technology SPDR (XLK), the Energy SPDR (XLE) and the Healthcare SPDR (XLV) recorded 52-week highs with strong opens today. While they may not close at these highs, these six sectors are clearly in long-term uptrends and these highs support a long-term uptrend in the stock market. Chart 1 shows XLI getting its third breakout in eight months with the move above 45 in early September. XLI moved above 46 last week and recorded another 52-week high today. The ETF may be short-term overbought and ripe for a rest, but the overall trend here is up. The indicator window shows the price relative trending higher since early May and hitting a new 52-week high today.
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Chart 1
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Chart 2
Chart 2 shows XLF breaking out in early September and building on these gains with a gap above 20.25 today. Broken resistance turns first support in the 20 area. A move below 20 would warrant a reassessment of the bullish breakout. The indicator window shows the price relative edging up and trying to reverse the eight week downtrend.
REGIONAL BANK SPDR REMAINS BELOW SUPPORT BREAK ... Despite a breakout in XLF and overall strength in the stock market, I am concerned with relative weakness in the Regional Bank SPDR (KRE). Chart 3 shows KRE breaking down in late August and remaining down. Broken support turns first resistance and this level held throughout September. In fact, the weak advance over the last two weeks looks similar to a rising flag, which is a bearish continuation pattern. A move below Friday's low would signal a continuation lower and affirm resistance in the 36.2 area. A break above 36.2 would put KRE back on the bullish track.
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Chart 3
The first indicator window shows Aroon Down surging to 100 for a bearish signal in mid August. Aroon Down has since turned down and is moving parallel to Aroon Up, which is also falling. These two indicators fall when price action is flat or a consolidation is taking shape. The first one to turn up signals an end to the consolidation. The lower window shows the price relative breaking support in late August and remaining weak in September. KRE has not partaken in the September surge.
COPPER ETF FAILS TO PARTAKE IN SEPTEMBER SURGE ... The German DAX Index ($DAX), Australian All Ords Index ($AORD) and Nasdaq all recorded 52-week highs this month and the global economy appears to be on the mend. Copper, however, did not get the memo because copper prices remain relatively subdued. Even though copper has the nickname Dr Copper for its ties to the economy, copper is not the metal it once was because it is not so freely traded. The Wall Street Journal reported in April that two firms account for much of the world's copper supply and these supplies are stored in just three warehouses (New Orleans, Antwerp and Johor). This does not make copper immune to technical analysis, but does undermine the metal's prowess as an economic indicator.
Chart 4 shows the Copper ETF (JJC) finding support in the 37 area this summer and bouncing to resistance in August. Resistance in the 42 area stems from the May highs. JJC fell back with a falling wedge that retraced around 61.80% of the prior advance. This is a good spot for a reversal, but we have yet to see an upside catalyst, such as a break above 40.5 or an MACD bullish cross. The big trend remains down, but I will be watching these two technical items for signs of an early breakout. Chart 5 shows Spot Copper ($COPPER) for reference.
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Chart 4
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Chart 5
YIELD CURVE CONTINUES TO STEEPEN ... Bill Gross, head of PIMCO, tweeted that it would be a big day for the yield curve and the risk-on trade because Lawrence Summers withdrew from contention for the Fed chairman nomination. Basically, the conventional wisdom suggests that the Fed will now taper at a slower pace than previously expected. Wall Street expected Summers to be the next Fed chair and built in expectations for his brand of tapering. With the market adjusting its expectations, Treasury yields are falling, Treasury bonds are advancing and stocks are surging, even though we still have yet to see a new Fed chair-person appointed and any future appointment will require confirmation from the Senate. In other words, this tapering game is still up for grabs and I am not sure what Wall Street is actually reacting to. Once again, we would probably be better off ignoring the Wall Street and watching the charts. Let's start with Treasury yields and Treasury bonds. Chart 6 shows 2-year, 5-year, 10-year and 30-year Treasury yields. The 30-year Treasury Yield ($TYX) is the main symbol. The others were added using "price (same scale)" as an overlay. As the chart shows, the 2-Year Treasury Yield ($UST2Y) is still near zero and there is no real yield to be had until you reach the 5-year horizon. The 5-yr Treasury Yield ($FVX) yields a paltry 1.5%, which is 15 on the chart.
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Chart 6
Chart 7 shows the Yield Curve 10YR-2YR ($YC2YR) over the last two years. This indicator plots the difference between the 10-year Treasury Yield ($TNX) and the 2-Year Treasury Yield ($UST2Y). The yield curve rises when this differential expands, and falls when this differential contracts. As you can see from the chart, the yield curve bottomed in August 2012 and seriously expanded from early May to mid September. In general, a steepening yield curve is positive for stocks because it indicates that Fed policy is loose. A steep yield curve also benefits banks because they can borrow at short-term rates and lend at long-term rates, thus capturing the spread.
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Chart 7
RSI FOR TLT TRACES OUT BULLISH FAILURE SWING... Chart 8 shows the 20+ Year T-Bond ETF (TLT) finding support near the August low this month and bouncing above 104 today. A small double bottom could be forming, but the trend here is clearly down and I would not get too excited just yet. First resistance is set just above 106. The first indicator window shows Aroon Down in bear mode since early August. The bear signal triggers when Aroon Down surges to 100. Aroon down has been falling the last three weeks as price action flattened and TLT traded between 102 and 106. A bullish Aroon cross would provide the first sign of a trend change. Aroon Up, however, needs to follow through with a surge to 100 for a complete trend reversal signal. You can read more about Aroon in our ChartSchool
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Chart 8
The lower indicator window shows RSI with a potential bullish failure swing. According to Welles Wilder, these occur when RSI moves below 30, bounces, pulls back, holds above 30 on the pullback and then breaks its prior high. This means a move above the August high would turn RSI bullish. Note that the bullish failure swing occurs independent of price action. In other words, a bullish divergence is not required for this signal. Also notice that there was a bearish failure swing in early May. Chart 9 shows the 10-year Treasury Yield ($TNX) for reference.
