LOWER HIGHS EXTEND FOR IWM AND QQQ -- HOW IS THE S&P 500 EVEN UP THIS YEAR? -- CHARTING THE RELATIVE BULLISH PERCENT INDEX -- RELATIVE BPI'S FOR UTILITIES AND STAPLES REMAIN STRONG -- RELATIVE BPI'S BREAK DOWN IN TECH AND CONSUMER DISCRETIONARY
LOWER HIGHS EXTEND FOR IWM AND QQQ... Link for today's video. Selling pressure hit small-caps and techs hard in early trading on Friday. With further weakness over the last few days, the Russell 2000 ETF (IWM) and Nasdaq 100 ETF (QQQ) are poised to extend their string of lower highs. These two have been the Achilles heel of the market since early March, which is when they started underperforming. Chart 1 shows IWM peaking in early March and forming successive lower highs in April. A lower high indicates that selling pressure is coming into the market at lower prices and buying pressure is not strong enough to push prices above the prior high. The most recent failure occurred at 115 and this level marks first resistance. The November-April lows still mark a long-term support zone. The indicator window shows the price relative breaking below the November-March lows and forging an eight month low, which means IWM is seriously underperforming SPY. Relative weakness in small-caps is not a good sign for the market as a whole.
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Chart 1
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Chart 2
Chart 2 shows the Nasdaq 100 ETF with what could evolve into a head-and-shoulders reversal pattern. The left shoulder formed in January, the head peaked in March and the right shoulder is now taking shape. A break below the green support zone would confirm this pattern. Before getting too bearish, note that the right half of a head-and-shoulders pattern often evolves into a falling wedge, which is a correction pattern. Sorry, technical analysis is never black and white, which is why I drew the pattern in gray! The indicator window shows the price relative (QQQ:SPY ratio) breaking the July trend line in March and moving to its lowest levels of the year (2014). This indicates that large-cap techs, sans Apple, are also showing relative weakness.
HOW IS THE S&P 500 EVEN UP THIS YEAR?... The S&P 500 is a market of stocks and these stocks can be grouped into different industry groups and sectors. Using the sectors for a sum-of-the-parts analysis, it is clear why the S&P 500 is up over the one-month, three-month and year-to-date timeframes. Ok, the gain is not that much, but the S&P 500 was still up around 1% year-to-date on Friday morning (11AM). Note that $SPX finished 2012 at 1848.36 and a close below this level is needed to turn negative for the year. PerfChart 3 shows year-to-date performance for the S&P 500 SPDR and the nine sector SPDRs. The numbers above each bar show the sector weightings in the S&P 500. Note that I added the weighting of the Telecom sector (2.5%) to the Technology SPDR weighting (18.45%) because Verizon, AT&T and Century Link are part of XLK. This combination weighting puts XLK over the 20% threshold and makes it the biggest sector.
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Chart 3
Eight of the nine sectors are up on this year-to-date PerfChart. The Consumer Discretionary SPDR is the only sector with a loss and the only sector actually weighing on the market year-to-date. Even though the Technology SPDR, Industrials SPDR and Finance SPDR are underperforming this year, they are still up and have yet to actually weigh on the S&P 500. Relative weakness in these key sectors is a concern, but the broader market is still in good shape as long as the majority of sectors show gains. Weakness will hit the S&P 500 when sectors representing over 50% of the market start breaking down. Right now only one sector can be considered weak: consumer discretionary. Chart 4 shows a PerfChart using the equal-weight sector ETFs from Rydex and the picture is similar.
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Chart 4
CHARTING THE RELATIVE BULLISH PERCENT INDEX... Relative performance is a key factor for sector rotation strategies. Even if you do not trade or invest in the sector SPDRs, relative performance metrics can be used to identify strengthening or weakening sectors for stock selection or further analysis. In the examples below, I am going to show how the relative Bullish Percent Index can be used to foreshadow strength or weakness in the underlying sector. The relative BPI is the sector BPI divided by the S&P 500 BPI. This makes it an indicator of an indicator so it should definitely be used in conjunction with other techniques. The Bullish Percent Index measures the percentage of stocks on a P&F buy signal, which is a double top breakout.
Chart 5 shows the relative BPI for the energy sector ($BPENER:$BPSPX) with three distinct swings: an upswing in September-October, a downswing from November to January and an upswing from February to April. In particular, the early February surge stands out because this ratio moved from the .55 area to the .80 area in just two weeks and broke above the late December high. I picked the late December high because it corresponds with a key high in XLE (bottom window). Notice that this breakout occurred well before the price relative (XLE:SPY ratio) breakout (middle window). Similarly, the Energy SPDR (XLE) did not break its late December high until late March.
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Chart 5
Note that the sector BPI is less than the S&P 500 BPI when the relative BPI is below 1. This is because the sector BPI is the numerator and the S&P 500 BPI is the denominator. This ratio moves above 1 when the value of the sector BPI is greater than the value of the S&P 500 BPI. With the move above 1 in early April, the Energy BPI ($BPENER) exceeded the value of the S&P 500 BPI.
RELATIVE BPI'S FOR UTILITIES AND CONSUMER STAPLES REMAIN STRONG... In addition to energy, the relative BPIs for the consumer staples and utilities sectors are also strong. First, they are above 1 and greater than the BPI for the S&P 500. Second, they surged over the last few months as strength within the sectors expanded. Chart 6 shows the relative BPI for the utilities sector ($BPUTIL:$BPSPX). Notice how the relative BPI surged above resistance and above 1 in January. After a pullback into early March, the relative BPI firmed for a few weeks and surged back above 1 in late March.
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Chart 6
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Chart 7
Chart 7 shows the relative BPI for the consumer staples sector ($BPSTAP:$BPSPX). This indicator fluctuated above/below 1 from September to March, but never dipped below .925 (the October low). With the March surge, the indicator moved above 1.1 and the consumer staples BPI is well above the S&P 500 BPI.
RELATIVE BPI'S BREAKDOWN IN TECH AND CONSUMER DISCRETIONARY... Signs of weakness are apparent in the relative BPIs for the consumer discretionary sector and the technology sector. Chart 8 shows the Technology BPI ($BPTECH) relative to the S&P 500 BPI. Notice how this relative BPI plunged in March, bounced in April and then fell sharply this week. Also notice that it failed below 1 and the Technology BPI is less than the S&P 500 BPI.
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Chart 8
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Chart 9
Chart 9 shows the consumer discretionary relative BPI in the main window, XLY in the middle and the Consumer Discretionary BPI ($BPDISC) in the lower window. First, notice that the relative BPI has been below 1 the entire year, which means that the Consumer Discretionary BPI is less than the S&P 500 BPI. Second, notice the large bearish divergence in the actual Bullish Percent Index in the lower window. XLY hit a new high in early March, but the BPI formed a lower high and moved below 50 in mid April. 50 marks centerfield and should be considered a long-term line in the sand for the Bullish Percent Index. The bulls still have an edge when above, and the bears have the edge when below.
LIST OF RELATIVE BPI SYMBOLS... Here is a comma separated symbol list for twelve relative BPIs. These list includes relative BPIs for the S&P LargeCap 100, Nasdaq 100, the nine sectors and the Gold Miners Index. This text can be used to add symbols to a ChartList.
$BPOEX:$BPSPX,$BPNDX:$BPSPX,$BPDISC:$BPSPX,$BPFINA:$BPSPX, $BPINFO:$BPSPX,$BPINDY:$BPSPX,$BPHEAL:$BPSPX,$BPSTAP:$BPSPX, $BPUTIL:$BPSPX,$BPMATE:$BPSPX,$BPENER:$BPSPX,$BPGDM:$BPSPX
OFF-SHORE DRILLERS MAKE MOVES WITH EXPANDING VOLUME... The Oil & Gas Equipment & Services SPDR (XES) and the Energy SPDR (XLE) hit new highs this week, but the offshore drillers remain well below their 52-week highs. These stocks may be poised to play a little catch up as several surged with good volume this week. It all got started when Diamond Offshore beat estimates and reported an increase in dayrates for rigs. The next four charts show offshore-related stocks that made big moves this week.
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Chart 10
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Chart 11
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Chart 12
