S&P 500 SPDR STALLS AFTER MINI BREAKOUT -- RUSSELL 2000 ETF HITS SHORT-TERM TREND LINE -- 20+ YR T-BOND ETF CONVERTS THE SQUEEZE PLAY -- NON-FARM PAYROLLS: A BLIP OR A NEW REALITY? -- ISM INDICES EXTEND WINNING STREAK
S&P 500 SPDR STALLS AFTER MINI BREAKOUT... Link for today's video. The major index ETFs remain in long-term uptrends, but moved into corrective mode after big surges in the second half of December. While I am not looking for a major trend reversal in the stock market, recent events suggest that this correction could extend. First, stocks were both short-term and medium-term overbought at the end of December. Second, the big miss from non-farm payrolls may curtail buying pressure. Third, money moved into Treasuries today and this is negative for stocks. Chart 1 shows the S&P 500 SPDR (SPY) hitting a new high with a 4+ percent surge at the end of December. Also note that the ETF is up over 10% since early October. These are big moves that will likely require a rest before the next leg higher. Rest comes in the form of a pullback or consolidation, such as a flat flag, a falling flag or a falling wedge. SPY got a little rest with a small falling wedge the first three days of the year and then broke above the upper trend line this week. The ETF, however, is struggling to hold this mini breakout as stocks edged lower early Friday. Failure to hold this small wedge breakout would argue for a deeper correction towards the 180-181 area. Such a move might also be enough to push 5-period RSI into oversold territory.
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Chart 1
RUSSELL 2000 ETF HITS SHORT-TERM TREND LINE... Chart 2 shows the Russell 2000 ETF (IWM) starting its correction in late December and forming a falling flag over the last two weeks. The ETF tried to break above the flag trend line on Thursday, but stalled out on Friday. It is a tough call here because IWM surged around 7% in late December and advanced some 15% since late August. Even though the bigger trends are up, these are big moves that may require more correction before the uptrend resumes. Should this flag breakout fail, broken resistance in the 112 area marks next support. Relative performance in small-caps is also a concern because the price relative flattened after the mid December breakout. I would like to see the IWM:SPY ratio break above last week's high to signal a return of relative strength in small-caps.
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Chart 2
20+ YR T-BOND ETF CONVERTS THE SQUEEZE PLAY... After a head fake to the downside, the 20+ YR T-Bond ETF (TLT) surged above the upper Bollinger Band and triggered a bullish signal. Chart 3 shows TLT with Bollinger Bands and the Aroon indicators. I first showed this chart on 20-Dec and suggested that a band break and Aroon Down surge above 50 would be bearish. Aroon Down surged above 50, but TLT did not break the lower Bollinger Band to complete the signal. Moreover, TLT bounced right back above 103 on Thursday and Aroon Up moved above 50. It was as if TLT had a heads-up on Friday's employment report. In any case, TLT surged above the upper Bollinger Band today and Aroon Up surged to 100. Also notice that TLT held above its August-Septmeber lows. Could TLT be putting in an intermediate term low? While I still think the big trend for Treasuries is down, a bounce in TLT could be negative for stocks because stocks and bonds are negatively correlated for the most part. Chart 4 shows the 7-10 YR T-Bond ETF (IEF) breaking the October trend line and CCI breaking its November highs for a momentum breakout.
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Chart 3
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Chart 4
NON-FARM PAYROLLS: A BLIP OR A NEW REALITY?... The Labor Department reported that non-farm payrolls increased 74,000 for the month of December, which was well below expectations and the lowest reading in almost three years. While clearly a disappointment as far as the labor market is concerned, keep in mind that this number is subject to revision and represents just one month. The 12-month average remains above 180,000 and we have yet to see an actual contraction in the job market, which would really be something to talk about. Chart 5 shows non-farm payrolls dipping below 100,000 for the first time since summer 2013. The indicator also dipped below 100K in the summer of 2012. Despite these dips, the long-term average remained strong and the stock market maintained its uptrend. Let's not get spooked by one number.
Chart 5
JOBLESS CLAIMS ARE STILL TRENDING DOWN... Chart 6 shows initial jobless claims turning quite volatile the last few months. The dots represent the weekly readings and the dark blue line is the four week moving average. This key average moved above 340,000 twice in the last few months, but remains in a downtrend overall. A downtrend in jobless claims correlates to an uptrend in the S&P 500. I would watch the green trend line and recent highs for signs of a change. A break above 375,000 in the four week moving average would suggest a slump in the job market and this could put off the taper. For now, the trend is down and the odds still favor taper throughout 2014.
Chart 6
Note that these charts were created using a StockCharts Pro Account and the user-defined index feature. The data comes from the St Louis Fed database.
ISM INDICES EXTEND WINNING STREAK... While the employment numbers are important, there are other economic indicators that chartists should watch for clues on the economy. In fact, chartists should not be fixated on one or two data points. Instead, try to see the big picture and ascertain if the economy is expanding or contracting. The ISM Manufacturing Index and ISM Services Index are both reported at the beginning of the month and these two economic indicators give us an idea of the general economic trend. The economy is expanding when these indicators are above 50 and contracting when they are below 50. The degree above or below 50 can also offer insights on the strength of the expansion or contraction. In general, readings above 50 support a long-term uptrend in the stock market, while readings below 50 argue for a downtrend. Chart 7 shows the ISM Manufacturing Index at 57 for the month of December, which is well above 50. In fact, this manufacturing gauge has been above 55 the last five months. Strength in manufacturing is positive for the industrials sector because the companies in this sector provide the capital goods required for manufacturing.
Chart 7
Chart 8
Chart 8 shows the ISM Services Index falling to 53 in December. This is down from the summer high at 58.6, but still well above 50. Note that the ISM Services Index has been above 52 since mid 2010 and still favors economic expansion. I would not become concerned unless we see a couple of readings below 52. Note that these charts were created using a StockCharts Pro Account.
NEW ORDERS AND BUSINESS ACTIVITY ARE STRONGER... Chartists looking for a more forward look from these indicators can turn to the ISM Manufacturing New Orders Index and the ISM Services Business Activity Index. Chart 9 shows the New Orders Index surging to its highest level since early 2011. In fact, this index has been above 60 the last five months and this bodes well for future strength in manufacturing.
Chart 9
Chart 10
Chart 10 shows the Business Activity Index falling to 55.2 in December, but remaining well above 50 and favoring expansion in the services sector. Notice that this indicator has been above 50 since September 2009. Readings above 50 support a long-term uptrend in the broad market (S&P 500).
