STOCKS EXTEND UPTRENDS AFTER THE SEPTEMBER SURPRISE -- HOME CONSTRUCTION ISHARES LEADS MARKET AS RATES FALL -- UTILITIES AND REITS SCORE BIG GAINS -- DOLLAR BREAKS MAJOR SUPPORT AND GOLD SURGES
STOCKS EXTEND UPTRENDS AFTER THE SEPTEMBER SURPRISE ... Link for today's video. The September Fed meeting has come and gone, and nothing changed, which was a surprise to most pundits. In its policy statement, the Fed decided not to taper its bond-buying program because the FOMC wants to wait for more economic data. Look's like we are back to square one with the Fed. The pundits will now get another month to debate the great taper. This surprising news sent stocks, gold and the Euro sharply higher. Treasuries were also higher after a very volatile day and oil surged as the Dollar weakened. In particular, we saw interest rate sensitive groups move higher as the Utilities SPDR (XLU), Home Construction iShares (ITB) and Real Estate iShares (IYR) surged. It is as if the market priced in tapering from April to August and then suddenly had to re-price for no tapering in one day. First, let's take a look at the stock market.
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Chart 1
Chart 1 shows the Russell 2000 ETF (IWM) within a rising channel since December 2012. Overall, the trend has been up since October 2011. While nobody knows the extent or duration of this trend, we can use the upper trend line of the rising channel to estimate an upside target. This trend line extends to the 110-113 area in October, which implies another 4-5% upside. Perhaps more importantly, chartists can mark key support levels to define this uptrend and trade accordingly until these levels are breached. The August low and lower trend line combine to mark a support zone in the 100 area. A break below this support zone would reverse the uptrend. Chart 2 shows the S&P 500 ETF (SPY) within a rising channel since December 2011. The upper trend line extends to the 180 area in October, which is another 4.5% higher. The August lows and November trend line combine to mark support in the 163 area.
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Chart 2
HOME CONSTRUCTION ISHARES LEADS MARKET AS RATES FALL... Chart 3 shows the 10-year Treasury Yield ($TNX) falling back towards 2.7% with a sharp decline this week. $TNX broke out of a consolidation in early August, but this breakout is now being challenged with the move to 2.7% (27 on the chart). The overall trend remains up, but today's surprise from the Fed put a strong bid into Treasuries. Remember, Treasury yields fall when Treasury bond prices rise. I am not ready to turn bearish on yields and bullish on Treasuries though. The trend since July 2012 is up and there is a lot of support in the 2.5% area. The indicator window shows how the Home Construction iShares (ITB) and Real Estate iShares (IYR) suffered during the interest rate surge from late April to mid August.
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Chart 3
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Chart 4
Chart 4 shows ITB breaking wedge resistance with a surge over the last two weeks. This wedge looks like a correction within a bigger uptrend. Moreover, the wedge breakout ended the correction and signaled a continuation of this bigger uptrend. Broken resistance marks first support at 22. The wedge lows mark key support at 20.
UTILITIES AND REITS SCORE BIG GAINS... All of the sudden, the Utilities SPDR (XLU) and the Real Estate iShares (IYR) are back in vogue. These two could do no wrong from November to April-May. Taper became part of our lexicon in April and these two fell sharply as the market price in higher rates. With today's big surge, one would think that the Fed replaced "taper" with "never ending". Chart 5 shows XLU surging over 3% this week and StochRSI breaking above its summer high. Also notice that XLU formed a higher low in early September. Even though such strength is impressive, the move seems a little excessive and taper talk could resurface in the coming weeks.
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Chart 5
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Chart 6
Chart 6 shows IYR forming a falling wedge the last five months and breaking the wedge trend line with a surge above 65 this week. Also notice that IYR found support near the October-November lows. The indicator window shows StochRSI breaking above the July high and exceeding .50 (the center line). A strong breakout should hold, while a weak one would fold. Therefore, I will be watching 63.5 in IYR and .40 in StochRSI. Moves below these levels would negate the breakout. As with XLU above, I am a bit skeptical because this big move is built on a premise (no tapering) that could be temporary. Yes, I know I am supposed to ignore the fundamentals, but I would like to see follow through before accepting this one day surge.
DOLLAR BREAKS MAJOR SUPPORT AND GOLD SURGES... Chart 7 shows the US Dollar Fund (UUP) taking a monster hit this week and breaking support from the July-August lows. The August 2011 trend line also marks support in this area. UUP appeared to get a bounce off support in late August, but this bounce failed miserably as the Dollar fell sharply the last two weeks. Quantitative easing dilutes the Dollar and keeps downward pressure on interest rates, both of which are Dollar bearish. The indicator window shows the Euro Currency Trust (FXE) breaking above its July-August highs.
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Chart 7
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Chart 8
Weakness in the Dollar and the prospect of never-ending quantitative easing put a big bid in gold as bullion surged back above 1350 an ounce. Chart 8 shows the Gold SPDR (GLD) dipping to 125.15 early in the day and surging to 132 on the close. That's a 5+ percent swing in one day. I am not, however, ready to turn bullish on bullion because this still looks like a counter trend rally within a bigger downtrend. The first bounce retraced 38.2% of the prior decline. GLD was turned back at 138 from May to August. A break above this level would open the door to the 150 area and the 61.80% retracement zone.
