BONDS ARE TESTING HEAD/SHOULDERS NECKLINE ON YIELDS -- SPX CONTINUES TO TEST WITHIN THE 1830/1860 RANGE -- XLY,XLK,XLI,XLB,XLV ALL HAVE SCTR'S HIGHER THAN 70 -- XLP,XLF,XLE ALL HAVE SCTR'S BELOW 50 -- XLU,XLP, XLV, XLY ARE TRENDING UP THIS MONTH
BONDS ARE TESTING HEAD/SHOULDERS NECKLINE ON YIELDS... The $TNX represents the 10 year bond yield as shown in Chart 1. This chart portrays a potential head/shoulders top. As yields go lower, bond prices go higher. This chart needs to be followed as it disagrees with the price action in the equities. So far, the yield has moved 40 basis points since the beginning of the year. Equity investors may find helpful information on where the markets are going as the $TNX approaches support at the 200 EMA which sits at 25.95.
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Chart 1
SPX CONTINUES TO TEST THE 1830/1860 RANGE... The market continues the sideways action at the 1850 area. I would expect a surge for the 'first of the month' money coming in. We'll see where it goes after the initial thrust into the first week in March. At the time of publishing, the 60 minute candle has pushed above 1850 again. We can see the market has worked sideways at this level for 2 months now. Some of the underlying changes in the market structure lead me to be cautious here. Next we'll review the sector SCTR performance.
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Chart 2
XLY,XLK,XLI,XLB,XLV ALL HAVE SCTR'S HIGHER THAN 70... This is still a positive setup for equities. I am watching the slope on the SCTR lines for clues as to which sectors are starting to go higher or sectors under performing. Having the strong growth sectors with an SCTR above 70 is important. Healthcare is considered a defensive sector but it has been performing extremely well on the back of Biotech. Charts 3 and 4 show the 5 sectors with SCTR's above 70.
Chart 3
Chart 4
XLP,XLF,XLE ALL HAVE SCTR'S BELOW 50... Once sectors lose their relative strength, the momentum based institutional investors pull back from adding to positions. A good example is the lack of performance in the energy sector. It continues to underperform. This underperformance in light of higher Natural Gas prices and $WTIC above $100 is surprising. But that would lead me to be very careful expecting further buyers to come in should it break above the previous highs. The Financial sector has started to underperform since the Fed taper announcement. The SCTR does an excellent job of pointing investors to stronger sectors.
Chart 5
XLU,XLP, XLV, XLY ARE TRENDING UP THIS YEAR... The first three are considered defensive sectors. Continuing on the theme of watching trends, the defensive sectors SCTR's are trending higher in general with different rates of change. One anomaly, which is not a defensive sector, is the cyclicals (consumer discretionary) sector. It is turning higher in SCTR performance after weakening below 70 for the first time in a long time. The chart is currently back above 70. Over a longer time frame, we can see the SCTR is trending down. This is an important juncture for the sector. Investors can stay long, but this weakness should be noted. If the SCTR moves back below 70, this would be a strong sell signal for me. If you look at the XLF and XLE charts above, they don't suddenly weaken. They slowly lose power. This may be the next step for discretionary. By using the SCTR to guide us, we can see if further weakness sets in, or if the sector can move up and hold above 70. Both the XLP and XLU stayed under the 70 line for the strong part of the move last year in the $SPX.
Chart 6
FOOD COSTS SURGE WELL ABOVE NORMAL INFLATION... The Fed has many tools to guide policy. One of the tools Janet Yellen talked about today was carefully monitoring the rate of inflation.She said the current low rate of inflation allows them to utilize extraordinary policy tools to reignite the economy. Recently, the broad majority of the food commodities have turned higher. Wheat is still weak, but the rest are firing on all cylinders. This may dampen consumer discretionary spending in the second quarter if this is maintained. You can see in the bottom right corner of Chart 7 the performance over the past week. The 3 month performance is shown in Chart 8.
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Chart 7
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Chart 8
BEST BUY MOVES AWAY FROM PRICE... Best Buy topped out around $44 after a great run as shown in Chart 9. It pulled back, dropped actually, to $22. It seems to have based after going 50% off and is currently trying to rebound. It has a significant gap to fill. In Chart 6 above, we noticed consumer discretionary and consumer staples improving. The charts of Walmart, Target and Macy's all seem to be trying to bounce here (not shown).
