NASDAQ BOUNCES OFF 200-DAY AVERAGE AND HELPS STABILIZE MARKET -- SO DO SMALL CAPS AND CONSUMER DISCRETIONARY STOCKS -- UTILITY LEADERSHIP IS A CAUTION SIGN -- SO ARE UPSIDE BREAKOUTS IN CONSUMER STAPLES AND ENERGY SHARES
NASDAQ BOUNCES OFF SUPPORT LEVELS... My last message suggested that the direction of the Nasdaq market held the key to overall market direction. That's because it led the spring selloff and was the first to test important support levels. So far those supports have held. Chart 1 shows the Nasdaq Composite Index achieving an upside reversal day yesterday after touching its 200-day moving average. And it did so on rising volume. It also survived a test of chart support at its early February low (3968). The Nasdaq gained another 1.3% today to lead the market higher. [Trading volume, however, was lower today]. That has helped stabilize the rest of market which is bouncing as well. The ability of the Nasdaq to hold above those support levels is encouraging. As Greg Schnell pointed out yesterday, however, the Nasdaq still has more work to do on the upside to turn its short-term trend back up again. It's still trading well below its 50-day average (blue arrow). The first thing it will need to do is clear initial resistance at last Thursday's intra-day high at 4185. That initial barrier can be seen more closely in the hourly-bar chart in Chart 2. The Nasdaq needs to clear that first barrier to interrupt the negative pattern of "lower highs and lower peaks" in place since early March. Biotech and Internet indexes, which caused most of the Nasdaq damage, are also testing their 200-day lines. So are some other key indexes and stock groups.
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Chart 1
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Chart 2
MORE 200-DAY LINES BEING TESTED... Small caps also led the recent market decline as did consumer discretionary stocks. Chart 3 shows the Russell Small Cap Index also bouncing off its 200-day line. It also held above chart support at its early February low. Chart 4 shows an similar upturn in the Consumer Discretionary SPDR (XLY). As in the case of the Nasdaq, however, both of those indexes also have a ways to go to turn their short-term trends back up again. The bigger question now is whether the spring correction has run its course, or if the current bounce is part of a broader topping pattern. That has yet to be determined. Weekly indicators for the major averages remain negative. In addition, seasonal trends turn even more negative in May. Also troubling is the fact that defensive groups are still showing market leadership.
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Chart 3
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Chart 4
UTILITIES LEAD DOW AVERAGES HIGHER... Charts 5 and 6 show the Dow Industrials and Dow Transports climbing back above their 50-day averages. Both of those averages need to hit new highs to re-establish their Dow Theory uptrends. Chart 7, however, shows the Dow Utilities already trading at new highs. In fact, the Dow Utilities are now trading at the highest level since 2007 and on the verge of reaching a new record high. Utilities have been market laggards since the March 2009 bottom. The fact that they're showing market leadership isn't a vote of confidence in market direction. Two other defensive groups that continue to lead are consumer staples and energy.
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Chart 5
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Chart 6
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Chart 7
CONSUMER STAPLES SPDR REACHES RECORD CLOSE... In a strong stock rebound, we would normally expect to see profit-taking in defensive stocks like consumer staples. That isn't happening. Chart 8 shows the Consumer Staples SPDR (XLP) climbing nearly 1% and achieving a new record closing high. The XLP/SPX ratio (top of chart) has been rising since early March. That shows that consumers have been buying defensive stocks during the spring, and are still doing so.
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Chart 8
ENERGY SPDR HITS NEW RECORD AS WELL... Chart 9 shows the Energy Sector SPDR (XLE) hitting a new record high again today. Its relative strength ratio (top of chart) has surged since March for the first time in months. Energy has gone from one of the market's weakest sectors to one of the strongest. That's normally not a good sign for the rest of the market. That's because rising energy shares usually hint at higher energy prices. Chart 10 shows the United States Oil Fund (USO) turning up in January and trading near a seven-month high. Gasoline prices are rising as well. Rising energy prices are the last thing a struggling economy needs.
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Chart 9
