TECH LEADERSHIP IS BULLISH OVERALL -- SPY APPROACHES NEW HIGH AS QQQ HITS NEW HIGH -- TWO STOCKS MAKING MOVES WITH BIG VOLUME -- AD AND AD VOLUME LINES NEAR NEW HIGHS -- NET NEW HIGHS SURGE ABOVE +2% -- RETAIL SPDR LAGS LIKE IT'S 2007
TECH LEADERSHIP IS BULLISH OVERALL... Link for today's video. After a strong finish to 2013, stocks started the year flat and then fell sharply in the second half of January. Selling pressure continued on the first day of February, but stocks soon firmed and mounted a pretty strong advance the last nine days. With a clear reaction low, chartists can now use the February low to mark key support on most charts. Even though the S&P 500 SPDR and Russell 2000 ETF have yet to record new highs, note that the Nasdaq 100 ETF, Semiconductor SPDR, Internet ETF and Networking iShares hit new highs as tech stocks led the rebound. Yes, the consumer discretionary sector and Retail SPDR are lagging, but it is hard to argue with leadership from the technology sector. The bullet lists below highlights some of the key bullish and bearish developments over the last few months. There are, of course, concerns, but the bullish evidence still outweighs the bearish evidence at this stage.
Bullish
- QQQ hit a new high on February 13th (big techs leading)
- XLK:SPY ratio hit a new high on February 13th (techs leading)
- S&P 1500 AD Line is near its January high (small-cap breadth is strong)
- S&P 1500 AD Volume Line is near its January high (large-cap breadth is strong)
- S&P 1500 High-Low Percent turned up and exceeded +2% (new highs are expanding)
- ISM Services (54) and Manufacturing (50) indices were above 50 in January (parts of economy are strong).
- SPY, QQQ, IWM, MDY and RSP hit new highs in January (long-term uptrend)
- RSP outperforming SPY since mid December (small-mid cap relative strength)
Bearish
- XLV and XLU hit new highs for 2014 (defensive sectors outperforming this year)
- January retail sales (ex autos) were flat (parts of the economy are stalling)
- January auto sales declined, but remain above the 15 million mark (parts of the economy are stalling)
- XLY:SPY ratio peaked at yearend and fell sharply in January (consumer discretionary sector shows relative weakness).
- XRT:SPY ratio peaked in November (retail shows relative weakness)
- XLF:SPY ratio peaked in June (finance shows relative weakness)
- Fed started tapering program in December
(click to view a live version of this chart)
Chart 1
SPY APPROACHES NEW HIGH AS QQQ HITS NEW HIGH... Low volume is a concern, but I think chartists should be careful when using ETF and exchange volume as an indicator. First, there are plenty of dark pools out there and we really don't know "true" exchange volume. Second, ETFs are at least one step removed from the underlying security. The S&P 500 SPDR (SPY) represents the S&P 500 index, which in turn represents five hundred stocks. Third, don't forget that volume is just an indicator, and indicators are secondary to price action. Fourth, trading performance is based solely on price action because profits and losses are not "volume" adjusted. In other words, long positions are not less profitable just because the advance occurred on low volume. Fourth, and perhaps most important, low volume advances do not always fail, especially when the big trend is up.
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Chart 2
Chart 2 shows SPY declining on high volume at least five times in past year. In addition, notice how subsequent advances occurred on seemingly low volume (May, July, October, this week). Despite these volume irregularities, SPY has been in a steady uptrend with a series of higher highs and higher lows. High volume declines stopped short of major trend reversals and low volume advances managed to forge higher highs. The most recent low formed in the trend line support zone and chartists can mark key support in the 175 area. The indicator window shows two of the more popular volume indicators: On Balance Volume (OBV) in red and the Accumulation Distribution Line (ACDL) in green. OBV is lagging after the high volume decline in late January, but the ACDL hit a new high this week and shows continue strength. Looks like a split decision. Chart 3 shows the Nasdaq 100 ETF (QQQ) hitting a new high with an advance on lower volume.
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Chart 3
TWO STOCKS MAKING MOVES WITH BIG VOLUME... Before knocking ETF and exchange volume, allow me to clarify that I do use volume analysis for individual stocks and I do use volume-based breadth indicators. In particular, expanding volume validates a bounce off support or a breakout in an individual stock. Chart 4 shows DR Horton (DHI) bouncing off support with big volume in early November, breaking resistance with good upside volume in mid December and surging with even bigger volume in late January. Chart 5 shows Noble Energy (NBL) falling to support from the June trend line zone and the summer lows. The stock bounced off this support zone last week with the biggest volume in over two years.
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Chart 4
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Chart 5
AD AND AD VOLUME LINES NEAR NEW HIGHS... The three key breadth indicators remain in bull mode. Chart 6 shows the S&P 1500 AD Line ($SUPADP) holding support from the December lows and surging to the mid January high. With another higher low, this key breadth indicator has extended its uptrend and shows no signs of underlying weakness in the broader market. Chart 7 shows the S&P 1500 AD Volume Line ($SUPUDP) also holding support and surging towards its January high. No sign of a downtrend here.
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Chart 6
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Chart 7
A note on volume-based breadth: The AD Volume Line is based on AD Volume Percent, which is a volume-based breadth indicator that breaks down exchange volume into advancing volume and declining volume. S&P 1500 AD Volume Percent ($SUPUDP) equals the volume of advancing issues less the volume of declining issues divided by total volume. The indicator tells where the majority of money is flowing. Again, I am not interested in total money flows (i.e. total volume). Instead, I am interested in net money flows. Are they positive or negative? Positive AD Volume Percent means advancing volume is greater than declining volume. Negative AD Volume Percent means declining volume is greater than advancing volume.
NET NEW HIGHS SURGE ABOVE +2%... Chart 8 shows the S&P 1500 High-Low Line ($SUPHLP) holding its 10-day EMA in February and moving to another new high this week. The indicator window shows S&P 1500 High-Low Percent ($SUPHLP) doing a double dip into negative territory and breaking above +2% last week. This double dip signal is similar to the one in early September. At this point, High-Low Percent should hold above +2% to keep the bears at bay. A dip back below +2% would show underlying weakness and question this signal.
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Chart 8
RETAIL SPDR LAGS LIKE IT'S 2007... As noted in the list above, there is some concern with relative weakness in the Retail SPDR (XRT). Chart 9 shows the S&P 500 in red, XRT in black and the price relative in the indicator window (XRT:$SPX). Working from left to right, notice how XRT peaked four months ahead of the S&P 500 in 2007. XRT peaked in early June and the S&P 500 peaked in early October. Also notice that XRT started underperforming the S&P 500 in April, a full six months before the S&P 500 peaked. Moving to late 2008, notice how XRT bottomed in November 2008 and the S&P 500 bottomed in March 2009. XRT outperformed S&P 500 for four months before the S&P 500 bottom. Fast forward to the last few months and we can see XRT peaking in mid November and showing relative weakness since mid November (three months). The S&P 500, in contrast, is near its all time high and showing no signs of material weakness.
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Chart 9
FINANCE SPDR LAGS, BUT TRENDS HIGHER... Even though relative weakness in retail is a concern, it is not enough to turn bearish right now. Keep in mind that relative weakness in retail was not the only bearish force at work in 2007. Chart 10 shows the Finance SPDR (XLF) in black, the S&P 500, in red and the price relative in the indicator window (XLF:$SPX ratio). Here are the key dates for 2007: the XLF:$SPX ratio peaked in early February, XLF peaked at the end of May and the S&P 500 peaked in early October. XLF underperformed the S&P 500 for over six months before the market peaked. Relative weakness turned to absolute weakness as XLF failed to confirm the October high in the S&P 500. XLF peaked four months ahead of the $SPX. By October 2007, we were seeing relative and absolute weakness in the finance sector. This was also true for the retail group and, by extension, the consumer discretionary sector. Looking at the last few months, XLF is slightly lagging the S&P 500 over the last six months, but this underperformance is not too pronounced. More importantly, XLF remains in an uptrend and has yet to show absolute weakness. I would, therefore, not be too concerned with a major top at this point in time.
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Chart 10
RETAIL SALES REMAIN UNINSPIRING, BUT POSITIVE OVERALL... Retail, food and motor vehicle sales declined in December and January, which marks the first two-month decline since May-June 2012. Retail and food sales ex-motor vehicles rose in December (.28%) and declined slightly in January (.01%). The main focus here is the ex-motor vehicles number because there are separate reports for auto sales. The current dip is, of course, a concern because retail spending drives some two thirds of GDP. The six month average is at .14% and still positive, but retail sales growth has been muted since the second quarter of 2013.
