SPY GETS OVERSOLD BOUNCE -- SMALL-CAPS LAG ON OVERSOLD BOUNCE -- BREADTH SHOWS MATERIAL SELLING PRESSURE -- NET NEW HIGHS DO THE DOUBLE DIP -- ECONOMIC INDICATORS TURN MIXED -- MANUFACTURING WEAKENS, BUT SERVICES REMAIN STRONG -- AUTO SALES STALL

SPY GETS OVERSOLD BOUNCE... Link for today's video. Stocks started the week under selling pressure as the S&P 500 SPDR (SPY) plunged below 175 on Monday to create a short-term oversold condition. Chart 1 shows the ETF with a support zone marked by the November low, April trend line and 50% retracement. Stocks firmed on Tuesday-Wednesday and rebounded late in the week with SPY moving back above 177.50. The big trend remains up and this bounce reinforces support in the 174-175 area. This is the white area where the trend line and support zone overlap. Even though the big trend is still up, SPY may hit short-term resistance quite soon. Notice that broken support and last week's high mark resistance in the 180-181 area. SPY needs to clear this zone to completely recover from the prior decline and signal a resumption of the long-term uptrend. Chart 2 shows the Nasdaq 100 ETF (QQQ) getting a bounce off support near the December lows and June trend line. QQQ has a chance to finish positive for the week, but needs to exceed last week's high for a short-term breakout.

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Chart 1

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Chart 2

SMALL-CAPS LAG ON OVERSOLD BOUNCE... Stocks got a pretty good oversold bounce late this week, but small-caps lagged and failed to recoup Monday's losses. This is negative because small-caps represent the riskier end of the stock market and have more exposure to the domestic economy. Chart 3 shows the Russell 2000 ETF (IWM) breaking support with a sharp decline below 113 in late January. After consolidating for four days, the ETF continued lower with a move below 109 on Monday. IWM bounced with the rest of the market over the last two days, but did not come close to Monday's high and did not make it back into the consolidation zone (blue box). Chart 4 shows the S&P SmallCap iShares (IJR)** failing to make it back above 104 this week.

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Chart 3

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BREADTH SHOWS MATERIAL SELLING PRESSURE... The S&P 1500 AD Line ($SUPADP) and S&P 1500 AD Volume Line ($SUPUDP) hit new highs in mid January and then fell rather sharply over the last three weeks. Even though these news highs indicate that the long-term trend is up, I am concerned that this correction could extend further because the declines were the sharpest since April-May 2012. In other words, we saw a material increase in selling pressure over the last two to three weeks. Such strong selling pressure may not dissipate overnight and could signal that a "real" correction is upon us.

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Chart 6 shows the 9-day SMA of S&P 1500 AD Percent ($SUPADP) in the main window and the S&P 500 in the indicator window. Why am I using a 9-day EMA? Because the AD Line peaked on 22-Jan and bottomed on 3-Feb (nine trading days). A 9-day SMA captures the average for AD Percent over this time frame. This indicator dipped below -30% on Monday, which was the lowest reading since May 2012. This means selling pressure over that nine day period was the most intense in eighteen months.

NET NEW HIGHS DO THE DOUBLE DIP... I showed a chart for the S&P 1500 High-Low Line ($SUPHLP) last week as it dipped into negative territory and moved back above +2%. Chart 7 shows this initial bounce failing as the indicator moved back into negative territory again this week. This indicator is perilously close to breaking the -2% threshold, which has not been breached since November 2012. A move below -2% would signal an expansion of new lows and this would indicate that selling pressure is spreading. For now, the indicator remains in bull mode. A move back above +2% would indicate that new highs are again expanding and this would be bullish.

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ECONOMIC INDICATORS TURN MIXED ... Economic indicators turned mixed this week, but still favor economic expansion. There were slow downs in manufacturing, auto-truck sales and employment, but the services side of the economy held its ground and remained strong. Overall, the economic indicators still favor a secular bull market in stocks.

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The table above shows some of the key economic reports for February and their respective dates. A green box means the indicator is positive overall. For example, the ISM Manufacturing Index box is green as long as the reading is above 50. The Light Weight Vehicle Sales box is green when sales increase and red when sales decrease from month-to-month, which occurred from December to January. The Initial Jobless Claims boxes are green when the 4-week average declines and red when it rises. Notice that jobless claims have been edging higher the last few weeks.

MANUFACTURING WEAKENS, BUT SERVICES REMAIN STRONG... The next four charts cover this week's ISM reports on manufacturing and services. These charts were created with a user-defined index using a StockCharts PRO account. First, note that readings above 50 favor economic expansion, while readings below 50 point to economic contraction. Second, note that the services portion of the economy is much bigger than the manufacturing portion, in both employment and GDP terms. Services account for over 80% of employment, while manufacturing jobs make up less than 20%. Services account for around 80% of GDP, manufacturing contributes around 19% and agriculture accounts for around 1%. It is clear that services do the heavy lifting in the US economy.

The ISM Manufacturing Index and ISM Manufacturing New Orders Index took big hits in January and weather got the blame. While it is certainly conceivable that bad weather can affect the manufacturing, the hit was pretty big as the ISM Index fell from 56.5 to 51.3 and the new orders index plunged from 64.4 to 51.2. The last big decline in the new orders index occurred in the spring of 2011. While I am concerned with such a big hit, both indices remain above 50 and still reflect growth, albeit at a slower pace.

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The ISM Services Index and ISM Services Business Activity Index both ticked higher, which shows that the services portion of the economy is doing just fine. In fact, both indices remain above 54 and show no signs of weakness.

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AUTO SALES STALL... Light Weight Vehicle Sales moved above 15 million units at the end of 2012, held this level throughout 2013 and even punched above 16 million twice. Sales remain strong overall, but the indicator did tick down over the last two months (November to December and December to January). I would mark my line in the sand at 15 million, which has held since late 2012. A dip below this level would put sales at their lowest level since 2011 and this would be negative.

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EMPLOYMENT PICTURE SOFTENS... After falling rather sharply from December 2012 to September 2013, Initial Jobless Claims ticked up over the last four months and the four week average has been above 320,000 for four months now. The big trend is still down and remains down as long as the four week average holds below 375,000. A move above this level would show a material increase in jobless claims and this would be negative for stocks (and bullish for bonds). Chart XX shows non-farm payrolls growing by just 113,000 in January and a mere 75,000 in December. The two month total is the lowest since early 2011 and shows softening in the labor market over the last two months. The 12-month average, however, remains at a healthy 182,000.

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