SMALL-CAPS START TO UNDERPERFORM -- BIOTECH ETFS LEAD MARKET DECLINE AND SHOW RELATIVE WEAKNESS -- $WTI/$BRENT SPREAD WIDENS TO SPRING LEVELS -- TESORO, VALERO, PHILLIPS AND WESTERN REFINING LEAD REFINERS HIGHER
SMALL-CAPS START TO UNDERPERFORM... Link for today's video. Small-caps are starting to underperform and show relative weakness. Chartists should keep an eye on this because prior break downs in the $OEX:$RUT ratio foreshadowed periods of weakness in the broader stock market. Small-caps are considered the canaries in the economic coalmine. They typically outperform when the economic outlook is bullish, but underperform when the economic outlook is less bullish or even negative. Chart 1 shows the Russell 2000 ($RUT) relative to the S&P 100 ($OEX), which shows small-cap performance relative to large-caps. Small-caps outperform when this ratio rises, and underperform when this ratio falls. The green dotted lines show resistance breaks that signaled the start of relative strength in small-caps. The red dotted line shows a support break that signaled the start of relative weakness in small-caps. Flash-forward to October 2013 and the price relative broke support by moving below its early October low. Also notice that a lower high formed in mid October. The combination of a lower high and support break indicate that the price relative is in a downtrend. This means small-caps are showing relative weakness and this is negative for the stock market.
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Chart 1
Chart 2 shows the Nasdaq relative to the NY Composite using the price relative ($COMPQ:$NYA ratio). Notice that that Nasdaq started outperforming in early May as the price relative broke resistance. The trend is still up, but the price relative could be forming a lower high in October. A down turn and break below support would signal relative weakness in the Nasdaq and this would also be negative for the broader market. The Nasdaq represents the high-risk end of the stock market. Relative strength suggests a strong appetite for risk, while relative weakness signals risk aversion.
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Chart 2
BIOTECH ETFS LEAD MARKET DECLINE AND SHOW RELATIVE WEAKNESS... Biotech stocks also represent risk appetite in the stock market. These high beta stocks outperform when the appetite for risk is strong and underperform when the market shuns risk. The Biotech iShares (IBB) and the Biotech SPDR (XBI) have both shown relative weakness in October. Chart 3 shows IBB falling sharply in early October, but reversing and rallying back to the early October highs. This peak acted as resistance because IBB failed to take out this high and turned sharply lower. Today's long black candlestick reversed the upswing and affirmed resistance. The August-October lows mark the next support zone in the 190 area. The indicator window shows the price relative (IBB:$SPX ratio) forming a lower high and turning down this week. Chart 4 shows XBI breaking down in early October, bouncing and hitting resistance near broken support. XBI did not make it back to the early October high and is weaker than IBB. The ETF broke the short-term trend line with a sharp decline on Wednesday and this signals a continuation of the early October trend line.
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Chart 3
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Chart 4
$WTI/$BRENT SPREAD WIDENS TO SPRING LEVELS... Refining stocks bucked the market on Wednesday and moved higher on good volume. Before looking at some of these stocks, let's review the spread between West Texas Intermediate and Brent crude. Refining stocks were hurt earlier in the year when the price of West Texas Intermediate ($WTIC) and Brent ($BRENT) neared parity. Tensions in the Middle East pushed oil prices higher this summer as $WTIC and $BRENT both exceeded 100 in July. Notice that WTI and Brent were at parity as the $WTIC:$BRENT ratio hit 1 in mid July. This ratio has since come down as the price of WTI fell faster than the price of Brent. US refiners are more competitive when the price of WTI is lower than Brent. Chart 5 shows WTI in black and Brent in red. The $WTIC:$BRENT ratio is shown in the first indicator window and Western Refining (WNR) is shown in the second window. Notice how the price of Western Refining falls as the $WTIC:$BRENT ratio rises. The stock then rises as the ratio falls. There is clearly an inverse relationship at work here.
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Chart 5
TESORO, VALERO, PHILLIPS AND WESTERN REFINING LEAD REFINERS HIGHER... Chart 6 shows Phillips 66 (PSX) finding support in the 55-56 area from July to early October and then breaking out with a surge above 62. This breakout held as the stock surged above 64 on good volume today. The indicator window shows the price relative (PSX:SPY ratio) breaking the April trend line and moving higher the last six weeks. PSX is starting to outperform the S&P 500 ETF.
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Chart 6
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Chart 7
Chart 7 shows Tesoro Petroleum (TSO) surging above 45 with good volume and hitting resistance from the May trend line. After pulling back last week, the stock firmed near the breakout and surged on good volume today. The indicator window shows the price relative (TSO:SPY ratio) on the verge of a breakout.
Chart 8 shows Valero Energy (VLO) firming in the 33-34 area from July to October and then surging above resistance with a big move the last few weeks. Upside volume was strong and the breakout held. The indicator window shows the price relative (VLO:SPY ratio) breaking above its early September high.
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Chart 8
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Chart 9
Chart 9 shows Western Refining (WNR) bottoming in July and forming a higher low in September. The stock followed this higher low with a breakout in October and the breakout is holding so far. The price relative also bottomed in July and moved higher the last few months.
GOLD AND SILVER ETFS HOLD THEIR BREAKOUTS... I wrote about the Gold SDPR (GLD) and the Silver iShares (SLV) last week as both formed corrective patterns. It looks like both broke resistance to reverse the medium-term downtrends. The next two charts use Heikin-Ashi candlesticks. This Japanese charting style reduces short-term volatility by forming one candlestick from two days of price data. Chart 10 shows GLD correcting with a wedge and breaking wedge resistance last week. Even though the ETF has not extended much past the breakout, the breakout is holding and broken resistance turns first support in the 127-128 area. A strong breakout should hold, and a move back below 127 would question the sustainability of the new uptrend. Chart 11 shows SLV battling in the breakout zone around 21.60. A move below 21 would signal a breakout failure and put SLV back in bear mode.
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Chart 10
