S&P 500 AD LINE HITS NEW HIGH -- S&P MIDCAP SPDR STALLS WITH RISING WEDGE -- S&P SMALLCAP ISHARES CHANNELS LOWER -- FINANCE SECTOR BULLISH PERCENT INDEX SURGES -- PRUDENTIAL TRIGGERS P&F BUY SIGNAL -- THE YIELD CURVE REMAINS POSITIVE AND STEEP
S&P 500 AD LINE HITS NEW HIGH... Link for today's video. The market remains split with large-caps holding up well since early March and small gaps moving lower the last two months. Mid-caps are caught somewhere in the middle and may ultimately tip the balance. Chart 1 shows the S&P 500 SPDR (SPY) stalling near its March-April highs this month. With the exception of three days in mid April, the ETF has traded in a seven point range since late February. This is a pretty tight, and dull, range. Note that the overall trend remains up and I am treating this as a consolidation within an uptrend. The late June trend line and mid April low combine to mark key support in the low 180s. The indicator window shows the AD Line for the S&P 500 ($SPXADP). This key breadth metric hit a new high in early May and remains in a clear uptrend. There is no bearish divergence here and no sign of internal weakness for S&P 500 stocks.
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Chart 1
S&P MIDCAP SPDR STALLS WITH RISING WEDGE... Chart 2 shows the S&P MidCap SPDR (MDY) in the main window and its AD Line in the indicator window. MDY was hit hard in early April and recovered with a rising wedge back to the 250 area. This level acted as resistance in late April and early May. The overall trend is still up on this chart, but I will be watching this rising wedge closely. A close below this week's low would break wedge support and argue for a continuation of the early April decline. This in turn would project a bigger support break in the 238-241 area. Given weakness in small-caps, a breakdown in mid-caps would suggest that weakness in spreading and this would be quite negative for the broader market. The AD Line shows no signs of weakness yet because it hit a new high in late April and remains above support from the March-April lows.
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Chart 2
S&P SMALLCAP ISHARES CHANNELS LOWER... The S&P SmallCap iShares (IJR) is clearly the weakest of the three because it peaked in March and moved to new lows in early May. The overall trend on chart 3 is still up because of the new high in March, but the falling channel defines the immediate trend, which is down. The upper trend line and early May high mark resistance at 108. A move above this level is needed to end the correction and signal a continuation of the bigger uptrend. As long as IJR falls, the rest of the stock market will be held hostage. Further upside in SPY and MDY will be difficult and there is a danger that weakness in small-caps ultimately drags down the rest of the market. Relative weakness in IJR certainly reflects a weak appetite for risk. The indicator window shows the AD Line for the S&P SmallCap 600 ($SMLADP). This key breadth metric peaked in mid March and formed a series of lower lows. The most recent low occurred this week as the AD Line moved below the mid April low.
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Chart 3
FINANCE SECTOR BULLISH PERCENT INDEX SURGES... The Finance BPI ($BPFINA) caught my eye this week because it surged from 70 to 84 in six days. This reflects new P&F buy signals within the sector and shows internal strength. As noted earlier this week, the finance sector is composed of several industry groups: money center banks, regional banks, REITs, insurance companies, asset managers, brokers and consumer finance companies. Money center banks feature prominently in the market-cap weighted Finance SPDR (XLF), but become relatively insignificant in an equal-weighted index or ETF, such as the Equal-weight Finance ETF (RYF). The Bullish Percent Indices also act as equal-weight indices because a P&F signal in JP Morgan ($205 billion) counts just as much as a P&F signal in Hudson City Bancorp ($4.92 billion).
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Chart 4
Chart 4 shows the Finance BPI above 55% since January 2012. During this stretch, the Finance SPDR and the Equal-weight Finance ETF are up over 75%. Most recently, the Finance BPI surged above its March high as more P&F buy signals triggered within the sector. This breakout is positive and could lead to higher prices for sector and industry group ETFs related to the finance sector. Chart 5 shows a screen shot of the Bullish Percent Indices from the Market Summary page.
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Chart 5
PRUDENTIAL TRIGGERS P&F BUY SIGNAL... Chart 6 shows an example of a Point & Figure buy signal, which is a double top breakout. Prudential (PRU) broke above the prior X column with a bounce in May (red 5). This reversed the prior P&F sell signal, which was a double bottom breakdown in April. Chart 7 shows CME group (CME) with a P&F sell signal in January (red 1). This sell signal remains in play until it is reversed with a buy signal. A move above 74 would forge a double top breakout and break the bearish resistance line.
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Chart 6
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Chart 7
THE YIELD CURVE REMAINS POSITIVE AND STEEP... The yield curve is still very positive and short-term rates are nowhere near long-term rates. What does this mean for the stock market? A positively sloped yield curve supports an expanding economy and an uptrend in stocks. An inverted yield curve (negatively sloped) is negative for the economy and the stock market. Chart 8 shows a snapshot of the Dynamic Yield Curve on October 25, 2006. This is what an inverted yield curve looks like. Notice that yields at the short end of the curve are above yields at the long end. Typically, yields at the long end remain relatively flat during the inversion process. It is yields at the short end that "fish tail" above yields at the long end.
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Chart 8
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Chart 9
Chart 9 shows the current yield curve. Notice how yields start low and slope up as the maturities extend. This is a normal or positively sloped yield curve. I would not be concerned about the yield curve as long as rates at the short end remain well below rates at the long end. Note that the yield curve was inverted from late July 2006 to early May 2007 and the S&P 500 did not peak until October 2007. The S&P 500 ignored the inverted yield curve for several months as it advanced over 20% from July 2006 to October 2007.
10-2 SPREAD REMAINS WIDE, VERY WIDE... Chart 10 shows another interpretation of the yield curve using the 10-2 yield spread ($YC2YR), which is the 10-year yield less the 2-year yield. This line reflects an inverted yield when the 2-year Treasury Yield ($UST2Y) exceeds the 10-YR Treasury Yield ($UST10Y). The red areas show when the 2-year yield was greater than the 10-year yield and the yield curve was negative. Notice how the yield curve was inverted for several months around the 2000 top in the S&P 500 and for several months before the 2007 peak. Currently, the 10-year yield is well above the 2-year yield and the spread is very positive. In other words, the yield curve is not even close to inversion and cannot be considered flat. Chart 11 shows the spread between the 10-year Treasury Yield ($UST10Y) and the 3-month Treasury Yield ($UST3M). Note that the 3-month yield is almost zero (.03%) and the 10-year yield is 2.61% (2.61 - .03 = 2.58).
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Chart 10
