SMALL-CAPS LEAD MARKET HIGHER WITH BIG MOVES -- AN OVERBOUGHT STUDY FOR IWM -- EQUAL-WEIGHT FINANCE ETF HITS NEW HIGH -- GOLDMAN AND MORGAN BREAK FEBRUARY HIGHS AS JPM PULLS A REVERSAL -- MONSANTO LEADS MATERIALS SPDR TO NEW HIGH
SMALL-CAPS LEAD MARKET HIGHER WITH BIG MOVES... Link for today's video. Turnaround Tuesday lived up to its reputation as stocks surged with a broad-based rally. The Russell 2000 ETF (IWM) and S&P SmallCap iShares (IJR) led the major index ETFs with sharp gains. Chart 1 shows IWM gapping up and hitting a fresh 52-week high. We can argue about overbought conditions and funny-mentals, but there is no argument on the current trend. It is up. Broken resistance turns first support to watch on a throwback, which is a small correction. The trend line zone extending up from the April lows and the Nov-Feb lows mark long-term support. The indicator window shows the IWM:SPY ratio moving above its prior highs to forge a 52-week high as well. This means small-caps are leading large-caps. Chart 2 shows IJR breaking to new highs and showing relative strength the last three weeks.
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Chart 1
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Chart 2
AN OVERBOUGHT STUDY FOR IWM... Even though long-term trends are up for the major index ETFs, I am concerned that this rally is getting long in tooth and stocks are overdue for a corrective period. First, let's consider the reasoning behind today's rally. Stocks were down on Monday because the markets were spooked by the situation in Ukraine. The first trading day of the month normally has a huge bullish bias, because fund managers typically put new month to work at the beginning of each month. Buyers held back on Monday because of the situation in Ukraine and this created pent-up demand, which was subsequently released on Tuesday. Now let's look at a short-term overbought study with IWM. Chart 3 shows IWM with the 20-day Rate-of-Change in the indicator window. The red dotted lines mark surges of 9% or more, of which there are four. The red shaded area shows the price action over the next month or two. In all four examples, IWM corrected at some point in the following weeks.
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Chart 3
EQUAL-WEIGHT FINANCE ETF HITS NEW HIGH... Strength in IWM stems from strength in the financial services sector, which accounts for around 23.64% of the ETF. Technology is the next largest sector with a 14.51% weighting and healthcare comes in third at 14.22%. Chart 4 shows the Finance SPDR (XLF) surging off support and exceeding its February high with a 2% gain. Also notice that XLF closed on its high. This surge affirms first support at the late February lows, and keeps the bigger uptrend alive.
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Chart 4
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Chart 5
Chart 5 shows the Equal-weight Finance ETF (RYF) moving above its January closing highs with a move above 40 today. RYF and XLF have the same stocks, but XLF is weighted by market-cap and RYF weights its components equally, which favors small and mid cap finance stocks over large-caps. I am using a line chart because the intraday highs and lows are quite erratic for this ETF. The trend is up and a new high shows strength. The indicator window shows the price relative peaking in June and moving lower the last seven months. RYH may show relative weakness, but it is clearly not weak on an absolute basis.
GOLDMAN AND MORGAN BREAK FEBRUARY HIGHS AS JPM PULLS A REVERSAL... Chart 6 shows Goldman Sachs (GS) firming in the 160 area for five days and then moving higher the last three weeks. The stock broke above its February high with a gap and strong close on Tuesday. Chart 7 shows JP Morgan (JPM) pulling back over the last two weeks and forming a reversal over the last five days. It is not a "textbook" candlesticks reversal, but the essence of a morning doji star is there. Chart 8 shows Morgan Stanley (MS) holding support in the 29 area and breaking above resistance with a gap and strong close today.
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Chart 6
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Chart 7
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Chart 8
MONSANTO LEADS MATERIALS SPDR TO NEW HIGH... Chemical stocks are leading the Materials SPDR (XLB) to new highs. Chart 9 shows XLB surging over 10% the last four weeks and hitting a new 52-week high today. Broken resistance turns first support in the 46 area. The indicator window shows the price relative hitting a new high as well. Note that Dupont (DD), Dow Chemical (DOW) and Monsanto (MON) account for around 30% of the ETF. Also notice that the top ten components account for 66.92% and this ETF is heavily weighted towards the chemicals group (DD,DOW,LYB,PX,PPG,ECL,APD). DD, DOW and LYB are trading at new highs and showing upside leadership. Chart 10 shows Monsanto (MON) trying to play a little catch-up with a break above the February high.
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Chart 9
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Chart 10
FREEPORT MCMORAN FORMS BULL FLAG... Freeport McMoran Copper & Gold (FCX) is also part of the materials sector, but it is in the metals and mining group. FCX also has interest in oil and gas exploration and production. Chart 11 shows the stock breaking down in January, bouncing in February and then consolidating with a bull flag. Even though today's surge broke the upper trend line to signal a continuation higher, I would like to see a move back above broken support to negate the January breakdown.
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Chart 11
J&J AND BRISTOL MEYERS POWER THE HEALTHCARE SECTOR ... The HealthCare SPDR (XLV) has been the strongest sector this year and continues to hit new highs. Chart 12 shows XLV advancing around 20% from its August lows to its March high (49.5 to 60). The advance was rather consistent from September to January, and then the ETF just took off the last four weeks as upside momentum accelerated. Even though XLV is quite overbought on a short-term basis and ripe for a correction, buying pressure refuses to let up. This is also true for IWM, XLB and others over the last four weeks. The indicator window shows the price relative (XLV:SPY ratio) hitting a new high as well.
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Chart 12
As the XLV chart shows, Johnson & Johnson (JNJ) is the largest holding and accounts for around 10% of the ETF. Chart 13 shows JNJ surging in early February, forming a flat flag for three weeks and breaking flag resistance with a big surge on Tuesday. This signals a continuation of the prior surge and targets a move to the prior highs, or perhaps even further. Chart 14 shows Bristol Meyers Squibb (BMY) getting a flag breakout on big volume and challenging its January high.
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Chart 13
