ANOTHER WEEK AND ANOTHER SET OF NEW HIGHS -- DEFINING OVERBOUGHT FOR THE S&P 500 SPDR -- TREASURIES RALLY ALONG WITH STOCKS -- PIMCO BOND ETF HITS NEW HIGH -- AD LINE AND AD VOLUME LINE GET EXTENDED -- NEW HOME SALES COULD HAVE FURTHER ROOM TO RUN
ANOTHER WEEK AND ANOTHER SET OF NEW HIGHS... Link for today's video. Even though stocks are getting overbought again, the bulk of the evidence remains bullish for the stock market. In fact, I should refer to the "bearish" indications as mere "concerns" because they have to do with relative performance and economic let downs. For example, the Dow Industrials is underperforming because it has yet to confirm the new high in the S&P 500, but the Dow is still in an uptrend. In addition, chartists should weigh the positives against negatives. It is like a game of tug-o-war with the bullish evidence on one side and the bearish evidence on the other. Will relative weakness in the Dow and Finance SPDR drag the broader market down? Or, will new highs in the Russell 2000, Nasdaq, S&P 1500 AD Line and S&P 1500 AD Volume Line pull the other groups higher. The bullish indicators clearly have more firepower and are likely to pull the remaining negative indications over to the bullish side. Once everything is aligned on the bullish side and there are no more bears left, we can breath a sigh of relief. And then the correction will likely begin. That's just the way is works sometimes.
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Chart 1
BULLISH EVIDENCE OUTWEIGHS BEARISH CONCERNS...
Bullish Evidence
- The S&P 500, S&P 500 Equal-Weight Index ($SPXEW) and S&P MidCap 400 hit new highs this week (This shows broad strength in the stock market).
- The Russell 2000 hit a new high and the $RUT:$OEX ratio hit a new high (Relative strength in small-caps is positive overall.)
- The Nasdaq 100 and Nasdaq hit new highs, as did their price relatives (The high-beta and high-risk ends of the market show relative strength).
- XLK, RYT, XSD, FDN, IGN and IGV hit new highs this week (The tech sector and tech groups are leading the market).
- XLY and the Equal-Weight Consumer Discretionary ETF (RCD) hit news high, as did RCD:SPY price relative (Renewed relative strength in the consumer discretionary sector is positive).
- The Home Construction iShares (ITB) and its price relative (ITB:SPY ratio) hit new highs this week. (Relative strength in homebuilders is positive overall).
- S&P 1500 AD Line hit a new high again this week (Small-cap breadth is strong.)
- S&P 1500 AD Volume Line hit a new high again this week (Large-cap breadth is strong.)
- S&P 1500 High-Low Percent is above +5% (New highs are comfortably exceeding new lows.)
- New home sales surged
- ISM Services (54) and Manufacturing (50) indices were above 50 in January.
Concerns
- The 10-YR Treasury Yield ($TNX) fell sharply this week. (A decline in rates and advance in Treasuries could point to sluggishness in the economy.)
- The Dow Industrials ($INDU), S&P LargeCap 100 and S&P SmallCap 600 remain below their yearend highs and have yet to confirm the other indices. (The Dow, large-caps and select small-caps are lagging.)
- The Industrials SPDR (XLI) and Finance SPDR (XLF) remain below their yearend highs and have yet to confirm the new highs in SPY and XLK.
- The XLF:SPY ratio hit a new low for 2014. (The finance sector is underperforming this year).
- January retail sales (ex autos) were flat (economy stalling)
- January auto sales declined, but remain above the 15 million mark (economy stalling).
- Fed started tapering program in November (less liquidity).
DEFINING OVERBOUGHT FOR THE S&P 500 SPDR ... The stock market is in pretty good shape when the biggest negative is actually a positive. Despite a weak seasonal pattern, February is going to finish strong with the S&P 500 adding over 4% and recapturing January's loss. Chart 2 shows the S&P 500 SPDR (SPY) moving above its January high to join several other ETFs with new highs this week. SPY is now up around 7% from its February low. The only negative is the fact that the index advanced over 7% in less than four weeks. This negative, however, is only a short-term issue because it takes strong buying pressure to become short-term overbought. This strong buying pressure forged a new high to affirm the overall uptrend. Short-term, two indicators suggest that SPY is at or near overbought levels. First, the ETF is approaching the upper trend line zone of a rising channel and this area may slow the advance. Second, the indicator window shows the 18-period Rate-of-Change, which captures the February advance. Readings below -4% suggested that the market was oversold, while readings above +7% suggested that the market was overbought. Chart 3 shows the Equal-Weight S&P 500 ETF (RSP) nearing the upper echelons of its rising channel.
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Chart 2
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Chart 3
TREASURIES RALLY ALONG WITH STOCKS... It was a good week for Treasuries as well as stocks, which makes me think something has to give. I am sure Rick Santelli is all over this one! The bond market is very sensitive to changes in the economy and Fed policy, which is also sensitive to changes in the economy. As the February economic reports showed, January was not a great month for the economic indicators. Markets are forward looking beasts and the bond market may be looking ahead to next week, which is chock full of reports (ISMs, Vehicle Sales, Beige Book and Employment Report). If the early numbers from March are like the early numbers from February, Treasuries could extend their rally and stocks could stumble. With the S&P 500 near an all time high, stocks are priced for perfection and anything less may curtail buying pressure or trigger profit taking.
Chart 4 shows the 20+ YR T-Bond ETF (TLT) breaking resistance and exceeding its 200-day moving average in late January. After falling back in early February, as the S&P 500 surged, TLT firmed in mid February and surged above 108 this week. This move keeps the 200-day cross and January breakout alive. Chartists can now use the February lows to mark key support.
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Chart 4
The indicator window shows TLT relative to SPY. Notice how TLT underperformed from June to December, and this was bullish for stocks. TLT outperformed in January, but the price relative fell back in February. With this week's surge, the price relative could be poised to turn back up and relative strength in TLT would be negative for stocks. Chart 5 shows the 7-10 YR T-Bond ETF (IEF) holding above its 200-day and challenging resistance.
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Chart 5
PIMCO BOND ETF HITS NEW HIGH... Chart 6 shows the Vanguard Total Bond Market ETF (BND) surging in September-October, forming a wedge in November-December and breaking out in January as the stock market stumbled. A pennant formed in February and the ETF broke pennant resistance with a surge above 81.25 this week. The uptrend in this bond fund is affirmed with support in the 80.75-81 area. Chart 7 shows the Pimco Total Return ETF (BOND) hitting a new high this week and falling back a little on Friday. Chartists can mark key support in the 106-106.25 area for signs of a trend reversal.
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Chart 6
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Chart 7
AD LINE AND AD VOLUME LINE GET EXTENDED... The S&P 1500 AD Line ($SUPADP) and S&P 1500 AD Volume Line ($SUPUDP) moved to new highs this week. Also note that the S&P 1500 hit a new high. The AD Line and AD Volume Line moved pretty much straight up over the last four weeks. Chart 8 shows the AD Line with a new high and long-term support marked by the December-February lows. The current run is around 470 AD Percent points. AD Percent extends from -100 to +100. Notice how the indicator moved from the 630 area to the 1100 area (yellow). The absolute level is not important because it depends on the starting date, which is June 3rd. As far as breadth surges are concerned, the four week change (+470) is the most since the summer surge from late June to mid July (+600). While this advance may have a little further to run, it is clearly getting long in tooth and some sort of corrective period may be in store for March. Chart 9 shows the AD Volume Line hitting a new high. Chart 10 shows the S&P 1500 High-Low Line ($SUPHLP) also hitting a new high.
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Chart 8
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Chart 9
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Chart 10
NEW HOME SALES COULD HAVE FURTHER ROOM TO RUN... John Murphy highlighted the surge in new home sales in Thursday's Market Message. This is indeed a significant milestone and the chart suggests further room to run. Chart 11 shows New Home Sales taking a dip below 400,000 this summer and rebounding with a surge back above 450,000 this year. I am not calling this a breakout, but note that home sales are trending up and there is further room to run. No, I am not looking for a return to the 2005 levels (> one million). However, a move back to the long-term average is certainly possible. New home sales oscillated between 350,000 and 850,000 from the mid sixties to the mid nineties. A move back to the middle of this range would put new home sales back to the 600,000 area.
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Chart 11
ECONOMIC REPORT CARD FOR FEBRUARY ... The economic reports for February are in and the final result is mixed. ISM Manufacturing and ISM Services started the month with weaker-than-expected numbers, but these indices remained above 50, which supports economic growth. Motor vehicle sales and retail sales disappointed as both declined in January. These two key metrics point to sluggishness in the economy. The housing indicators were mixed with weakness in starts and permits offset by strength in new home sales.
Chart 12
The employment picture softened as non-farm payroll growth remained subdued and jobless claims stalled in the 333,000 to 339,000 area for the entire month. This suggests that next week's employment report will be soft as well. In other words, don't expect non-farm payrolls to expand by 200,000 or more. More likely, we will see a muddle along number in the 75000 to 125000 area.
