RELATIVE PERFORMANCE FLATTENS FOR XLY -- RETAIL SPDR SURGES TO HOLD BREAKOUT ZONE -- SEMICONDUCTOR SPDR CONSOLIDATES AFTER GAP -- ISM DUO STILL FAVORS ECONOMIC EXPANSION -- NON-FARM PAYROLLS CONTINUE MODEST EXPANSION
RELATIVE PERFORMANCE FLATTENS FOR XLY... Link for today's video. The stock market surged on Friday, but there were some noticeable pockets of "less strength". The finance sector and banking group led the market and closed up for the week, but the Consumer Discretionary SPDR (XLY) lagged and closed down for the week. Chart 1 shows XLY plunging below 63 on Thursday and surging back above 63 on Friday. Friday's white candlestick was smaller and failed to recoup the prior losses. The indicator window shows the price relative turning flat in October. This means the Consumer Discretionary SPDR performed in line with the S&P 500 ETF (SPY) over the last six weeks. The green dotted line marks support for the price relative. Even though the ETF has stopped outperforming SPY, it has yet to start underperforming. I would, therefore, give the bulls the benefit of the doubt as long as relative performance holds firm. A break below support would show relative weakness in XLY. This would be negative and likely weigh on the broader market.
(click to view a live version of this chart)
Chart 1
RETAIL SPDR SURGES TO HOLD BREAKOUT ZONE... The retailers are an important part of the consumer discretionary sector and retail spending is important to the economy. Chartists can gauge the health of retail spending by looking at the Retail SPDR (XRT), which is an ETF that consists of 101 retail stocks. This broad-based ETF represents an excellent cross section of the retail industry. Chart 2 shows XRT within an uptrend and breakout in mid October. Broken resistance turned into support in the 83 area and held the last few weeks. XRT surged over the last two days and moved within a few cents of a new high. This is positive overall and supports the current uptrend in the stock market. The indicator window shows a little cause for concern because the price relative weakened in October as XRT underperformed. The price relative did, however, hold support and turn up the last two weeks. As with XLY, the bulls get the benefit of the doubt as long as the price relative holds support.
(click to view a live version of this chart)
Chart 2
SEMICONDUCTOR SPDR CONSOLIDATES AFTER GAP... Even though the Semiconductor SPDR (XSD) remains in a medium-term up trend, I am concerned with the short-term breakdown and relative weakness. Chart 3 shows the Semiconductor SPDR (XSD) falling sharply with a gap below 58 and this gap zone turning into resistance. The indicator window shows the price relative (XSD:SPY ratio) also breaking down as XSD turned from outperformer to underperformer. It is as if the ETF is simply consolidating after its breakdown. A move below 56 would signal a continuation lower and target a support test in the 54 area. A move above last week's high is needed to fill the gap and signal a resumption of the bigger uptrend.
(click to view a live version of this chart)
Chart 3
Chart 4 shows the MarketVectors Semiconductor ETF (SMH) forming a triangle over the last few weeks. Notice that the ETF did not exceed its mid October high and the price relative moved lower over the last few weeks. SMH, which is heavily weighed towards Intel (INTC) and Taiwan Semi (TSM), has been underperforming the broader market since the second week of October. A break below triangle support would be bearish and likely weigh on the tech sector. Should SMH hold support, look for an upside breakout to signal a continuation of the bigger uptrend.
(click to view a live version of this chart)
Chart 4
ISM DUO STILL FAVORS ECONOMIC EXPANSION... The ISM Manufacturing Index (NAPM) and the ISM Non-Manufacturing Composite Index (NMFCI) were reported last week and both support the long-term uptrend in the stock market. Note that the symbols shown in parenthesis refer to the FRED database at the St Louis Fed site (https://research.stlouisfed.org/). I downloaded this data, put it in CSV files and created user-defined indices with a StockCharts Pro Account.
Even though economic indicators can lag the stock market and the stock market often reverses before the economy, these indicators are still helpful because they can be used to confirm the overall trend in the stock market. Economic indicators should favor an economic expansion when the stock market is trending up and economic weakness when the stock market is trending down. The S&P 500 is clearly in a long-term uptrend and this uptrend is supported by the ISM Manufacturing Index (NAPM) and the ISM Non-Manufacturing Composite Index (NMFCI). Together, these two capture a large swath of GDP. NAMP captures manufacturing and the non-manufacturing index captures services. Anything above 50 favors economic expansion and supports an uptrend in stocks. Chart 5 shows NAPM well above 50. Chart 6 shows that NMFCI is even strong because it has been above 52 since mid 2010.
Chart 5
Chart 6
NON-FARM PAYROLLS CONTINUE MODEST EXPANSION... The Labor Department reported a surge in non-farm payrolls on Friday, but Initial Jobless Claims also surged in October. Chart 7 shows non-farm payrolls exceeding 200,000 in October and the 12 month moving average hitting 194,000. Even though these numbers are below the 300,000 levels seen in 2004 and 2005, the levels are certainly not shabby. Payrolls are growing at a modest clip and this is positive overall.
Chart 7
Chart 8 shows Initial Jobless Claims, which is reported weekly. The dots shows the individual weeks and the blue line is the four-week moving average. Economists often use a four week average because these series can be volatile. The four week average surged to its highest level since spring and exceeded 350,000. I set the line in the sand at 360,000 and we have yet to see the four week average breech this level. Weekly spikes do occur and it is important that we see this data series settle back down with a few readings below 325,000. Another reading above 370,000 would be quite negative for the employment picture.
Chart 8
