FINANCE SPDR BOUNCES OFF BROKEN RESISTANCE -- REGIONAL BANKS OUTPERFORM BIG BANKS -- EEM BOUNCES WITHIN BULL FLAG -- SOLAR ETF STARTS TO LAG -- FIRST SOLAR FORMS BEAR FLAG, PLUS SCTY AND SPWR -- MANUFACTURING AND SERVICES REMAIN STRONG

FINANCE SPDR BOUNCES OFF BROKEN RESISTANCE... Link for today's video. The Finance SPDR (XLF) led the market lower over the last four days, but the ETF found support near broken resistance and surged around 1% in early trading on Friday. Chart 1 shows XLF in a long-term uptrend with breakouts in mid October and mid November. The ETF broke triangle resistance in October, hit resistance near 21 and pulled back with a falling flag. XLF went on to break flag resistance in November and exceed the mid October high. A key tenet of technical analysis is that broken resistance turns first support. Well, XLF pulled back to broken resistance in the 21 area and got a nice bounce. The indicator window shows XLF relative to SPY using the price relative (XLF:SPY ratio). XLF has underperformed SPY since late July and the price relative is currently near the late July trend line. A break above this trend line would provide the first sign that relative strength is returning to the finance sector.

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Chart 1

REGIONAL BANKS OUTPERFORM BIG BANKS... Chart 2 shows the Regional Bank SPDR (KRE) surging above 39.50 with a gap on Friday. Overall, the trend here is up as KRE broke to new highs in late October and extended its uptrend throughout November. Sure, this move is getting a long in tooth because the ETF is up almost 15% in two months, but there are simply no signs of selling pressure right now. The early October trend line marks first support and broken resistance marks second support in the 37.5 area (yellow). The indicator windows shows KRE relative to XLF (regional banks relative to big banks). Notice that the price relative has been rising since late September and regional banks are outperforming big banks.

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Chart 2

EEM BOUNCES WITHIN BULL FLAG... Taper talk hit the Emerging Markets ETF (EEM) hard in May-June, but the ETF managed to rebound with a rally back to the May high. Chart 3 shows EEM backing off this high and moving into a consolidation the last two to three months. Notice that broken resistance turned into support as the ETF bounced off the 40-40.5 level twice. The most recent bounce did not gain much traction as EEM pulled back to 41 this week. It is possible that a falling flag is taking shape and I am watching resistance at 42.5. A hold above the support zone and break above this resistance level would be short-term bullish for EEM. The indicator window shows EEM relative to the S&P 500 ETF (SPY). After a brief period of relative strength from late August to mid October, the price relative fell back and tested the summer lows. EEM continues to underperform the US benchmark and this is a concern. A break above the mid November high is needed to signal an improvement in relative performance. Chart 4 shows the Vanguard Emerging Markets VIPERS (VWO) testing support from the Sep-Nov lows.

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Chart 3

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Chart 4

SOLAR ETF STARTS TO LAG... The S&P 500 surged to a new high at the end of November, but the Solar ETF (TAN) failed to keep pace and moved lower the last few weeks. Chart 5 shows TAN breaking flag resistance in early September and embarking on a great run into early November. This flag breakout, by the way, was noted in the Market Message on September 4th. After hitting resistance at 24 the first two weeks of November, TAN fell back below 38 and started underperforming the S&P 500. The ETF is poised to test an important support zone in the 36 area. The late June trend line and late October lows mark support here. The indicator window shows the price relative peaking in early November and moving lower the last four weeks. This decline suggest that solar stocks are losing favor on Wall Street.

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Chart 5

FIRST SOLAR FORMS BEAR FLAG, PLUS SCTY AND SPWR... Chart 6 shows First Solar (FSLR) falling below 60 and then forming a bear flag the last two weeks. Bear flags slope up and form after a sharp decline. A break below flag support would signal a continuation lower and target a move to the 50 area. Chart 7 shows SunPower (SPWR) with a sharp decline and a rising wedge. A wedge break would signal a continuation lower. Chart 8 shows Solar City (SCTY) bouncing off broken resistance with a move to 55. However, notice that this bounce retraced 62% of the prior decline and the stock stalled the last two days.

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Chart 6

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Chart 7

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Chart 8

MANUFACTURING AND SERVICES REMAIN STRONG... The beginning of the month is always a busy period for economic indicators. Even though economic indicators typically lag the stock market at turning points, they move in unison with the stock market during extended trends. The major stock indices are clearly in long-term uptrends and these uptrends are supported by the economic indicators. In fact, the steady stream of positive economic reports supports a Fed taper sometime in 2014, possibly in the first or second quarter.

Among other reports, this week saw the release of the ISM Manufacturing Index, Auto-Truck Sales, GDP, the ADP Employment Report, the ISM Non-Manufacturing Composite Index, Initial Jobless Claims and the Employment Report. We do not need to hang on every report. Instead, I prefer to focus on a handful of reports that capture the broad trend for the economy. Basically, I want to know if the economy and labor market are growing or not. Growth supports an uptrend in the stock market, and downtrend in Treasury bonds. Conversely, a a contracting economy and labor market support a downtrend in stocks and uptrend in Treasury bonds.

The first two charts deal with the economy. Chart 9 shows the ISM Manufacturing Index (NAMP) surging above 55 and holding above 55 the last five months. Anything above 50 points to expansion in the manufacturing sector and readings above 55 are very strong. Strength in the manufacturing sector supports a long-term uptrend in the Industrials SPDR (XLI), which is full of big manufacturers. Chart 10 shows the ISM Non-manufacturing Composite Index (NMFCI) slipping over the last few months, but remaining comfortably above 50. Anything above 50 is positive for the services side of the economy and this indicator has been above 52 since the middle of 2010.

Chart 9

Chart 10

NON-FARM PAYROLLS CONTINUE TO EXPAND ... The next two charts cover the employment side of the economy, which is integral to taper talk. Initial Jobless Claims (CLAIMS) is a weekly number that provides good insight into monthly non-farm payrolls. Chart 11 shows a clear negative correlation between claims and the S&P 500. The S&P 500 falls when claims rise and the index advances when claims decline. Most recently, weekly claims dipped below 300,000 and the 4-week moving average moved below 325,000 again. The overall trend is down and this suggests that the labor market is improving. Chart 12 confirms the trend in claims as Non-Farm Payrolls (PAYEMS) grew by 203,000 in November. The 12-month average is at 191,000 and the economy is continuing to add jobs at a steady clip. These numbers will surely keep taper talk on the front burner.

Chart 11

Chart 12

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.