RELATIVE WEAKNESS IN KEY GROUPS UNDERMINES SMALL-CAPS -- RETAIL SPDR BOUNCES OFF SUPPORT ZONE -- REGIONAL BANK SPDR BREAKS WEDGE TREND -- PEABODY BREAKS DOWN, BUT CONSOL HOLDS STRONG -- COAL ETF FAILS TO HOLD BREAKOUT

RELATIVE WEAKNESS IN KEY GROUPS UNDERMINES MARKET... Link for today's video. The S&P 500 and Dow Industrials notched new highs yet again, but the Russell 2000 remains well below its spring highs and continues to lag. Chart 1 shows the Russell 2000 in red and the S&P 500 in black. Notice that the Correlation Coefficient ($SPX,$RUT) even turned negative for a few days in mid May. It is quite rare to see a negative correlation between the S&P 500 and Russell 2000. This indicator, however, is back into positive territory, but the performance differential remains.

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Chart 1

In addition to the Russell 2000, the Retail SPDR (XRT), the Regional Bank SPDR (KRE) and the Home Construction iShares (ITB) are also well below their spring highs and lagging the broader market. These three groups are important to the broader market and may ultimately resolve the discrepency between small-caps and large-caps. Retailers are important because retail spending accounts for some two thirds of GDP. Regional banks are important because they feature prominently in the small-cap finance sector, which is the biggest sector in the Russell 2000. Housing is an important component to the economy. PerfChart 2 below shows year-to-date performance for 10 key industry group ETFs. The S&P 500 is up around 4% year-to-date, but XRT, ITB and KRE are down year-to-date and showing relative weakness. These three could hold the key to stock market performance in the coming weeks. Breakouts in all three would be very bullish and help small-caps. Continued relative weakness and break downs would likely drag down large-caps.

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Chart 2

RETAIL SPDR BOUNCES OFF SUPPORT ZONE... Chart 3 shows the Retail SPDR (XRT) bouncing off the 80-81 area three times since mid April. These bounces prevented a break down, but the ETF remains range bound since mid April and well below the spring highs. A break below the support zone (80) would be quite bearish for retail and this would likely pull down large-caps. Look for a surge above the May highs to signal a revival in retail that could lead to relative strength in small-caps as the market embraces more risk.

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Chart 3

REGIONAL BANK SPDR BREAKS WEDGE TREND... Chart 4 shows the Regional Bank SPDR (KRE) breaking above the wedge trend line and holding this breakout for five days. The trend line break is positive, but we need to see follow through above the resistance zone at 39 to fully reverse the immediate downtrend. Such a move would be most positive for the small-cap finance sector. The indicator window shows the price relative in a clear downtrend as KRE underperforms SPY. A break above the May highs is needed to signal a return to relative strength.

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Chart 4

ITB STALLS NEAR RESISTANCE... Chart 5 shows the Home Construction iShares (ITB) holding well above the 2013 low as a falling wedge formed the last few months. The ETF broke above the wedge trend line with a surge last week and then stalled the last five days. John Murphy noted ITB surging off the 200-day moving average in his Market Message on May 25th. The surge and trend line break are holding, and this is positive, but we need a little more follow through to get above the resistance zone for a clean breakout.

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Chart 5

PEABODY BREAKS DOWN, BUT CONSOL HOLDS STRONG... News that the Environmental Protection Agency (EPA) will propose cutting coal plant CO2 emissions 30% by 2030 is weighing on coal stocks. Chart 6 shows Peabody (BTU) failing to hold its mid May gap and breaking support from the early May low. The stock also broke the mid March trend line and moved below the neckline breakout. I featured BTU as it broke resistance in late April. This breakout clearly failed and the stock is now back near the February lows. Charts evolve as new price bars are added. Chartists need to monitor developments and determine what it would take to prove their thesis otherwise. My bullish thesis was clearly proven otherwise when BTU closed at 17.50 on May 22nd.

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Chart 6

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Chart 7

Not all coal stocks are created equal. Arch Coal (ACI) and Alpha Natural Resources (ANR) are trading near 52-week lows and below $4 per share. Such low stock prices and 52-week lows suggest that bankruptcy is a real possibility down the road. Chart 7 shows Consol Energy (CNX), on the other hand, hitting a 52-week high in early May and remaining in an uptrend. CNX stands out because it is the leading producer of high-Btu bituminous coal, which is cleaner burning coal. The stock took a hit late last week as word of the EPA proposal leaked, but rebounded on Monday and established first support in the 43 area.

COAL ETF FAILS TO HOLD BREAKOUT... The Coal ETF (KOL) is heavily weighted towards non-US coal-related stocks, but this ETF came under selling pressure as well. Consol Energy and Peabody are in the top ten, but only account for around 13% of KOL. International coal stocks are more dependent on Chinese demand for their growth, and Chinese attitudes towards coal may also be changing. Chart 8 shows KOL breaking above its 50 and 200 day moving averages with a surge in late March and early April. The ETF hovered just above these moving averages for several weeks, but failed to hold the breakout after a sharp decline the last 2-3 weeks.

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Chart 8

COPPER AND SILVER UNDERPERFORM GOLD YEAR-TO-DATE... Copper, which is a key industrial metal, bounced over the last two months, but is down year-to-date and it is one of the weakest commodities this year. PerfChart 9 shows the year-to-date performance for nine commodities (spot prices). Spot Copper ($COPPER) is down over 7% this year and the weakest of the nine, by far. Palladium, which hit a new high last week, is the strongest with a 16+ percent gain. This key metal is used in catalytic converters. Surprisingly, Spot Gold ($GOLD) is up over 3% year-to-date and Spot Silver ($SILVER) down just over 3%. Silver continues to underperform gold and this weakness could reflect a general weakness in industrial metals.

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Chart 9

BASE METALS ETF CHALLENGES RESISTANCE... The Base Metals ETF (DBB) is also down year-to-date, but the ETF is challenging resistance in the 16.40 area with a surge today. Chart 10 shows DBB hitting a new low in March and rebounding with a surge to 16.40 in late April. The ETF pulled back from this area twice in the last five weeks and is once again challenging resistance. In addition to the April-May highs, resistance here also stems from the 62% retracement. A breakout here would be quite bullish for base metals and could signal an upturn in global demand.

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Chart 10

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Chart 11

Chartists looking for clues on DBB can turn to copper, which has a high positive correlation to DBB. Note that DBB consists of equal weights of copper, zinc and aluminum. Chart 11 shows the Copper ETF (JJC) breaking support in March and moving to a new low in mid March. The ETN rebounded with a move back to broken support and the 50-62% retracement zone. The big trend for copper, and DBB for that matter, is down and this could be a counter trend bounce. Nevertheless, chartists should respect the immediate uptrend as long as it holds. The trend line extending up from mid March and a buffer mark key support at 37.50. A break below this level would reverse this immediate uptrend and this would be negative for DBB.