SIZING UP A POTENTIAL CORRECTION IN SPY -- MARKING KEY SUPPORTS FOR IWM AND QQQ -- SCTR BREAKS DOWN FOR THE FINANCE SPDR -- SMALLER BANKS HOLD UP BETTER THAN BIGGER BANKS -- ENERGY-RELATED ETFS BREAK DOWN
SIZING UP A POTENTIAL CORRECTION IN SPY... Link for today's video. Stocks have been quite mixed up in January. This mixed trading applies to the major index ETFs and the sector SPDRs. First, we saw new highs in the Russell 2000 ETF (IWM), the Nasdaq 100 ETF (QQQ) and the S&P MidCap SPDR (MDY). These new highs tell us that small-caps, mid-caps and large-techs are leading the market, which is bullish for stocks overall. These new highs, however, were not confirmed by the S&P 500 SPDR (SPY) and the Dow Diamonds (DIA). On a closing basis, SPY closed at a new high at the end of December and failed to close above this high in January. On an intraday basis, SPY hit a new high last week, but failed to exceed this high this week. Even though it is a short-term non-confirmation, it is clear that SPY is not keeping up and this increases the odds of a correction, which could run 5-10%. On a closing basis, SPY has not experienced a 10% pullback since the summer of 2011! On an intraday high-low basis, the last 10% pullback occurred in spring 2012. Chart 1 shows SPY with the 6% zigzag indicator to filter out moves that are less than 6%. There have been four pullbacks since October 2011 and these pullbacks range from 7 to 11 percent. With the current high at 185, a 7% pullback would extend to the 172 area and an 11% pullback would extend to the 165 area. The orange area marks a support zone based on broken resistance in the 170-172 area. Just below this area, the August-October lows mark support in the 163-165 area. These areas can be used for potential correction targets.
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Chart 1
MARKING KEY SUPPORTS FOR IWM AND QQQ... If SPY were to correct, it is likely that IWM and QQQ would also correct or pullback. IWM represents small-caps, which have higher betas than large-caps and tend to be more volatile. QQQ represents large-cap techs, which also have higher betas than the average SPY stock and tend to be more volatile. A 7% correction in SPY, therefore, would argue for a 10% correction in IWM and QQQ. Chart 2 shows QQQ since November 2012, which is when the current run began. Except for a 7% correction in May-June, it has been pretty much straight up for QQQ the last fourteen months. Even though there is nothing on this chart to suggest a correction, the advance is clearly long in tooth and ripe for a rest. The January lows and June trend line mark first support in the 85-86 area. The 38% retracement and November 2013 low mark next support in the low 80s. A 10% correction from the January high would extend to the 80 area. Chart 3 shows IWM with the next three support levels to watch. A 10% correction from the current high would carry IWM to the 106 area (118 - 11.8 = 106.2).
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Chart 2
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Chart 3
SCTR BREAKS DOWN FOR THE FINANCE SPDR ... I highlighted relative weakness in the Consumer Discretionary SPDR (XLY) on Wednesday and voiced concern that the most economically sensitive sector was underperforming. Not only is XLY underperforming, but it is also weak on an absolute basis with a 4+ percent decline year-to-date. While concerned, I was not too worried because the other three offensive sectors were holding up quite well. Until Thursday. Chart 4 shows the Finance SPDR (XLF) gapping up and closing above 22 last week. This gap, however, did not hold long as the ETF gapped down on Thursday and closed sharply lower. The failed gap up and new gap down argue for a short-term reversal, which means a correction is underway. Broken resistance and the December low combine to mark the first support zone in the 20.75-21 area. The real damage can be seen with the StockCharts Technical Rank (SCTR) in the indicator window. Notice how the SCTR broke below the October low and recorded a 52-week low. The odds of a correction just increased with the finance sector joining the consumer discretionary sector in the relative weakness club. The technology and industrials sector continue to show relative strength though and this offset could make for choppy trading in the broader market. Chart 5 shows the Insurance ETF (KIE) breaking support. You can read more about the SCTR in our ChartSchool article
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Chart 4
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Chart 5
SMALLER BANKS HOLD UP BETTER THAN BIGGER BANKS... On a positive note, weakness in the finance sector seems to be specific to the big banks because the Regional Bank SPDR (KRE) is holding up relatively well, for now. Big banks have more exposure to emerging markets and are more vulnerable to any shocks that might hit the global financial system. Relative strength in regional banks also explains relative strength in small-caps because regional banks are more likely to be small and part of the Russell 2000. Large banks, such as JP Morgan (JPM) and Citigroup (C), feature prominently in the S&P 500 and S&P 100. These big banks are weighing on XLF and SPY. Chart 6 shows KRE breaking out earlier this week and holding this breakout so far. The January lows mark first support in the 39.5 area.
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Chart 6
ENERGY-RELATED ETFS BREAK DOWN ... Greg Schnell featured the Energy SPDR (XLE) on January 16th as it tested a long trend line and momentum deteriorated. Chart 7 shows the ETF bouncing off support with a move above 87 this week, but a rising flag formed and the ETF broke flag support this week. In addition, the ETF broke the August trend line and shows relative weakness. The indicator window shows the price relative in a downtrend since October and hitting a new low last week. Chart 8 shows the Oil & Gas Equip & Services SPDR (XES) breaking flag support on Thursday and moving below its December low. Chart 9 shows Oil & Gas E&P SPDR (XOP) forming a dark cloud at resistance on Thursday and moving lower on Friday.
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Chart 7
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Chart 8
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Chart 9
EMERGING CURRENCY ETF REFLECTS CONFIDENCE CRISIS... World markets have been spooked recently because some key emerging market currencies are hitting multi-year lows. The Turkish Lira hit an all time low today and the Argentinian Peso fell the most in over ten years. Turkey is a big emerging market with ties to the EU. Argentina is a large Latin American economy that would affect Brazil and Venezuela. This is not the first emerging markets currency crisis. We only have to look back to 1997 and the Asian currency crisis that started with a collapse of the Thai Baht. John Murphy noted both relative and absolute weakness in the Emerging Markets iShares (EEM) in his weekend market message. Today's weakness in the emerging markets currencies can be seen in the Emerging Currency ETF (CEW), which is breaking to a two year low. Chart 10 shows CEW peaking in October and moving below its 2013 low today. Even though a cheaper currency makes emerging market exports more competitive, currency valuations also reflect investor confidence. New lows in CEW suggest that investor confidence in emerging markets is not very high at the moment. Also keep in mind that ETF based on foreign stocks are usually exposed to the country's currency. Return is therefore based on two parts: the stock and the currency, which means ETF holders have double exposure.
