NEW HIGHS ABOUND AND AFFIRM BULL MARKET -- SPY CHALLENGES HIGH AS QQQ RECORDS NEW HIGH -- EQUAL-WEIGHT S&P 500 OUTPERFORMS, BUT RUSSELL 2000 LAGS -- REGIONAL BANKS WEIGH ON FINANCE SECTOR -- RETAIL REMAINS A DRAG ON THE CONSUMER DISCRETIONARY SECTOR
NEW HIGHS ABOUND AND AFFIRM BULL MARKET... Link for today's video. Despite relative weakness in a few key groups, the bulk of the evidence remains bullish for the stock market. Several key ETFs and indicators recorded 52-week highs this week. Except for retail, the bearish points are mostly concerned with relative weakness. Note that the consumer discretionary and finance sectors are underperforming, but have yet to actually break down and reverse their uptrends. The same cannot be said for retail because the Retail SPDR appears to be in a downtrend. Relative and absolute weakness in retail is the biggest negative right now. Despite a few negatives lurking in the market, the positives outweigh the negatives and the bulk of the evidence remains bullish.
Bullish
- SPY:TLT ratio surged in February (stocks outperforming bonds)
- QQQ, QQEW and RSP hit new highs this week (long-term uptrends)
- XSD, FDN and IGN hit new highs this week (key tech groups are strong)
- SPY and MDY are close to their highs (long-term uptrends)
- RSP:SPY ratio hit a new high this week (small and mid caps show relative strength)
- S&P 1500 AD Line hit a new high this week (small-cap breadth is strong)
- S&P 1500 AD Volume Line hit a new high this week (large-cap breadth is strong)
- S&P 1500 High-Low Percent is above +5% (new highs exceed new lows)
- XLK:SPY ratio hit a new high on February 13th (techs leading)
Bearish
- XLV and XLU hit 52-week highs this week (defensive sectors leading the market)
- XLF:SPY ratio hit a new low for 2014 (finance sector underperforming this year).
- XRT:SPY ratio hit a new 52-week low this week (retail remains an underperformer)
- XLY:SPY ratio peaked at yearend and fell sharply this year (consumer discretionary sector shows relative weakness).
- Fed started tapering program in November
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Chart 1
SPY CHALLENGES HIGH AS QQQ RECORDS NEW HIGH... The S&P 500 SPDR (SPY) surged back to its January highs with a big move this month and is on the verge of recording another new high. Chart 2 shows the ETF finding support in the 175 area and moving back above 182.5 this week. SPY may indeed be short-term overbought after a 5+ percent advance in less than three weeks, but it is by no means weak. The trend line zone extending up from the April low and the support zone combine to mark first support in the 175 area. Notice how this trend line zone touches five lows to create a rising support zone. The uptrend is firmly intact as long as this trend line and the early February low hold. Chart 3 shows the Nasdaq 100 ETF (QQQ) hitting a new high this week and extending its long-term uptrend. The trend line zone marks first support in the 86 area, while the February lows mark support in the 84 area.
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Chart 2
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Chart 3
EQUAL-WEIGHT S&P 500 OUTPERFORMS, BUT RUSSELL 2000 LAGS... The Equal-Weight S&P 500 ETF (RSP) is outperforming the S&P 500 SPDR, but the Russell 2000 ETF (IWM) is underperforming. I suspect that IWM is underperforming because of relative weakness in the finance sector, which accounts for 23.31% of IWM. Technology (14.76%) is the next biggest sector, and much smaller. Chart 4 shows IWM breaking the trend line zone with the late January decline, finding support in the 107.5 area and surging back above 115. Despite the trend line break, I think the overall uptrend remains intact on this chart and I will probably adjust the trend line in a few weeks. The November-February lows mark key support. The indicator window shows the price relative (IWM:SPY ratio) flattening over the last four to five months. This means IWM has performed inline with SPY since mid September.
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Chart 4
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Chart 5
I am not that concerned with IWM performance because the Equal-Weight S&P 500 ETF (RSP) is outperforming the S&P 500. RSP represents the small and mid cap stocks within the S&P 500, while SPY represents the large-caps. Note that the top 50 stocks in SPY account for around 46.5% of the ETF. This leaves 53.5% for the remaining 450 stocks. Chart 5 shows RSP moving to a new high this week and showing upside leadership. The indicator window shows the price relative (RSP:SPY ratio) moving to a new high as RSP outperforms SPY in 2014.
REGIONAL BANKS WEIGH OF FINANCE SECTOR... Even though the Finance SPDR (XLF) is underperforming this year, the ETF has yet to actually start a downtrend and seriously weigh on the stock market. Chart 6 shows XLF within a clear uptrend over the last eleven months. XLF bounced off the trend line support zone this month, but remains below its January high. Nevertheless, the February bounce affirms support in the 20.5 area and we have yet to see a lower low. A break below support would reverse this uptrend and weigh on broader market. The indicator window shows the price relative peaking in early January and falling as XLF underperforms this year.
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Chart 6
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Chart 7
Chart 7 shows the Regional Bank SPDR (KRE) breaking the trend line zone in late January and then bouncing with a rising flag. This flag failed near the trend line break as KRE broke flag support with a sharp decline. This could set up a support test in the 35-36 area. A break above 39 is needed to put the uptrend back on track. The indicator window shows the price relative peaking at the end of January and moving lower the last five weeks. KRE is underperforming the market this year.
RETAIL REMAINS A DRAG ON THE CONSUMER DISCRETIONARY SECTOR... Chart 8 shows the Consumer Discretionary SPDR (XLY) falling sharply in January and then rebounding in February. With this reaction low, I expanded my trend line zone and will mark key support in the 61-62 area. XLY remains below its yearend high and shows relative weakness. Notice that the price relative (XLY:SPY ratio) peaked on January 2nd and moved lower the last six weeks. Even though relative weakness in this key sector is a potential negative, I would not become alarmed unless a lower high forms and the ETF breaks key support.
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Chart 8
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Chart 9
Chart 9 shows the Retail SPDR (XRT) breaking down in mid January and falling over 10% with a sharp decline. It is hard to imagine this decline as a mere correction, which means it may be an impulse move. XRT became quite oversold and bounced back to the 82 area this week, but I view this as an oversold bounce after a break down, which means we may see another test of the early February low. The indicator window shows the price relative hitting a new low this week as XRT continues to lag the broader market.
BREADTH INDICATORS SHOW UNDERLYING STRENGTH... Some key groups may be lagging, but other groups are picking up the slack and the big picture remains bullish. Most notably, chart 10 shows the S&P 1500 AD Line ($SUPADP) hitting a new high this week and chart 10 shows the S&P 1500 AD Volume Line ($SUPUDP) following suit. A new high in the AD Line shows broad market strength because small and mid-caps dominate the S&P 1500. A new high in the AD Volume Line shows strength in large-caps, which dominate volume. Together, these new highs show strength in the market as a whole. Chartists can use the December-February lows to mark long-term support zones.
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Chart 10
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Chart 11
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Chart 12
Chart 11 shows the S&P 1500 High-Low Line ($SUPHLP) exceeding 10% at the beginning of the week and then falling back. There is some concern that Net New Highs failed to exceed 15% in mid January and barely exceeded 10% in February as the market surge. However, there are still more new highs than new lows. Fewer new highs indicate less strength, but we have yet to see actual weakness, which would require an increase in new lows.
HOUSING STARTS AND BUILDING PERMITS STUMBLE... There were four economic reports of interest this week. Well, at least four that captured my interest. Even though economic indicators lag, they do trend and uptrends in these key economic indicators support a bull market in stocks. The overall tone remains positive for the economy, but several indicators experienced setbacks in January. The red boxes show the indicators with negative moves and the green boxes show the indicators that remain positive. Cold weather is getting the blame and we could see this setback extend into February, which has been unseasonably cold as well.
Chart 13
It is easy to see how cold weather would affect housing starts and perhaps industrial production, which could trigger an uptick in jobless claims. Chart 14 shows Housing Starts hitting the 1.1 million mark late last year and then plunging below 900,000 in January. The overall trajectory remains up and I would not become concerned unless this number breaks below the 2013 low (say below 800,000). Chart 15 shows Building Permits falling the last three months, but the decline was less sharp and the indicator remains in a clear uptrend. Again, I would not become concerned unless permits break below their 2013 low.
Chart 14
Chart 15
Chart 16 shows Industrial Production falling in January as the one-month rate-of-change indicator turned negative. This is hardly surprising after the big miss from the ISM Manufacturing Index at the beginning of the month. The overall trend remains up and one month is not enough to suggest a long-term trend reversal here.
Chart 16
Chart 17 shows initial jobless claims hovering in the 320,000 to 360,000 area over the last four to five months. The decline has definitely slowed, but we have yet to see a substantial increase. A move above 375,000 in the four-week average would be substantial and indicate weakness in the labor market.
Chart 17
