QQQ AND IWM MAINTAIN BREAKOUTS AND LEADERSHIP -- XLY TAKES A RELATIVE PERFORMANCE DIVE -- STEEL ETF FALLS BACK TO SUPPORT -- STOCKS ARE UNDERPERFORMING TREASURIES THIS YEAR -- PIMCO BOND FUNDS SURGE IN JANUARY
QQQ AND IWM MAINTAIN BREAKOUTS AND LEADERSHIP... Link for today's video. The major index ETFs remain in uptrends and these uptrends may seem long in tooth, but we have yet to see sustained selling pressure or a significant decline (10%). Declines were limited because buyers were quick to step in over the last six months. Even so, there are pockets of selling pressure in key groups this month and this selling pressure could spread to the broader market. First, let's review the broader market and then address some of these concerns. Chart 1 shows the Russell 2000 ETF (IWM) breaking out and hitting a new high last week, which means this ETF is in a clear uptrend. The September trend line and January lows mark key support in the 113 area. The indicator window shows the IWM:SPY ratio turning up over the last two weeks as IWM outperforms SPY. Relative strength in small-caps and a new high in IWM are positive for the market overall.
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Chart 1
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Chart 2
Chart 2 shows the Nasdaq 100 ETF (QQQ) breaking out last week and hitting a new high. Even though the ETF stalled over the last few days, the breakout is holding and a new high affirms the overall uptrend. Broken resistance and the January lows mark key support. The indicator window shows the QQQ:SPY ratio moving to a new high today as large-cap techs continue to outperform the broader market. Relative strength in techs is also a positive for the market overall.
XLY TAKES A RELATIVE PERFORMANCE DIVE... The first sign of concern comes from the Consumer Discretionary SPDR (XLY), which has severely underperformed the S&P 500 this year. Weakness in the consumer discretionary sector can be attributed to retail stocks, which are down sharply year-to-date, and homebuilders, which are also down year-to-date and underperforming. Chart 3 shows XLY hitting a new high at yearend and the price relative confirming relative strength with a new high as well. Even though the ETF is down just 3% from its 52-week high and above the December lows, relative performance took a beating in January as the price relative broke below its October lows. Relative weakness in the most economically sensitive sector is not a good sign for the market overall. Turning to the price chart, XLY remains in a six month uptrend with a new high just three weeks ago. The short-term trend, however, is down as XLY trades at its lowest level of the month. A break above 66 is needed to reverse this short-term downtrend and signal a continuation of the bigger uptrend.
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Chart 3
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Chart 4
Chart 4 shows the Equal-Weight Consumer Discretionary ETF (RCD) falling to its December lows with a rather sharp decline this year. This equal-weight version is on the verge of breaking support and looks weaker than the market-cap version (XLY). These equal-weight ETFs show what is happening with the average stock in the ETF, which means the small and mid caps within the ETF. The indicator window shows RCD relative to the Equal-Weight S&P 500 ETF (RSP). Notice that this price relative plunged below its October low and hit a six month low in January. Judging from the price chart and relative performance, it appears that the average consumer discretionary stock is having a rough time in 2014.
STEEL ETF FALLS BACK TO SUPPORT... Steel is considered a cyclical industry that is correlated to economic performance, which drives demand for steel products. Chart 5 shows the Steel ETF (SLX) breaking triangle resistance and hitting a new high in late December. However, as with XLY above, this new high did not hold long as SLX broke fell sharply in early January. It looked as if SLX was bouncing off support last week, but this bounce has already failed as the ETF moved below 47 today. A break below key support in the 46-46.5 area would be bearish for steel stocks. The indicator window shows the price relative peaking in early November and forming a lower high in late December. Steel stocks are underperforming the broader market and this is negative. Chart 6 shows the DJ US Steel Index ($DJUSST) failing to hold the December breakout and falling to support today.
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Chart 5
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Chart 6
STOCKS ARE UNDERPERFORMING TREASURIES THIS YEAR... The performance of stocks relative to Treasuries is also a concern going forward. Stocks represent the appetite for risk, and Treasuries represent the appetite for safety. Yes, this is the old risk-on risk-off trade. Chart 7 shows the S&P 500 SPDR (SPY) relative to the 20+ YR T-Bond ETF (TLT) using the price relative, which is the SPY:TLT ratio. Stocks outperform Treasuries when this ratio rises and underperform when this ratio falls. Overall, stocks have been outperforming Treasuries for over a year. Notice that this ratio bottomed in mid November 2012 and moved steadily higher the last thirteen months. Since November 2012, there have been three pullbacks that lasted four weeks or more than these coincided with small corrections in the stock market. The current decline is just three weeks old, but it is relatively sharp as SPY underperforms TLT here in January. Relative strength in TLT suggests a certain risk aversion in the stock market and this could lead to a correction.
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Chart 7
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Chart 8
PIMCO BOND FUNDS SURGE IN JANUARY... Bond funds also came alive in January and money moved into relative safety. In particular, the PIMCO Muni Bond ETF (MUNI) and the PIMCO Total Return Bond ETF (BOND) broke out with big moves on January 10th, which were triggered by the big miss in non-farm payrolls. Chart 9 shows BOND finding support in the 104.25 area and breaking wedge resistance with a surge above 105.5 the second week of January. This breakout is clearly holding as prices remain well above the four-week trend line, which captures the short-term uptrend. I would consider this breakout negative for stocks because it means money is moving into bond-related assets and this means there is less money available for stocks. The green trend line extending up from the late December low marks upswing support. A move below 105 would break this trend line and negate the January breakout. Such a failure would be positive for stocks. Chart 10 shows MUNI with a breakout in early January and move above the early November high.
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Chart 9
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Chart 10
CONSUMER STAPLES SPDR FORMS SHORT-TERM BEARISH PATTERN... The Consumer Staples SPDR (XLP) is also underperforming the broader market, especially over the last ten weeks. Chart 11 shows XLP moving higher from late August to mid November and then stalling with resistance at 43. Notice how the price relative (XLP:$SPX ratio) peaked the first week of November and moved steadily lower the last two months. On the price chart, XLP fell sharply the first three days of the year and then consolidated the last two weeks. This looks like a bear flag, a break of which would signal a continuation lower. Chart 12 shows Procter & Gamble, which is the biggest component for XLP, peaking in late November and moving lower in December and January. This stock is severely underperforming the broader market and downside volume is outpacing upside volume.
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Chart 11
