STOCKS MOVE INTO OFFENSIVE MODE -- CONSUMER DISCRETIONARY AND TECH JOIN THE LEADERSHIP CIRCLE -- SPY ZEROS IN ON 200 AS S&P 500 TARGETS 2000 -- INFLATION IS EDGING HIGHER, BUT STILL CONTAINED -- TREASURY BOND ETFS BACK OFF LONG-TERM RESISTANCE
STOCKS MOVE INTO OFFENSIVE MODE... Link for today's video. The stock market stepped it up another gear with big gains and new highs. Most of the major index ETFs recorded new highs this month already. The Russell 2000 iShares (IWM) hit an intraday new high last week and remains close to its March high. The Russell MicroCap iShares (IWC) is the laggard because it has yet to reach its March high. Even though IWM is at its high and IWC is below its high, both led the market higher over the past week and the past month. PerfChart 1 shows one month performance for nine major index ETFs. Notice that mid-caps, small-caps and micro-caps are the clear leaders. This reflects a healthy appetite for risk in the stock market. In addition, note that smaller companies tend to be more domestically focused with less international exposure. They have higher betas and are more tied to the performance of the US economy. Renewed leadership in these riskier groups bodes well for the stock market and the economy.
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Chart 1
CONSUMER DISCRETIONARY AND TECH JOIN THE LEADERSHIP CIRCLE... Relative weakness in the consumer discretionary sector was a concern a month ago, but not anymore. PerfChart 2 shows the Consumer Discretionary SPDR (XLY), Technology SPDR (XLK), Energy SPDR (XLE) and HealthCare SPDR (XLV) leading sine June 3rd. XLY came to life this past week with a new 52-week high and a gain that was greater than that of the S&P 500. It is quite positive to see these two sectors leading the stock market. The consumer discretionary sector is the most economically sensitive sector and relative strength is a positive sign for the economy. The technology sector is also an important barometer because it has the stocks with the highest betas. This means the tech sector represents the appetite for risk and a healthy appetite for risk bodes well for stocks. In contrast to these offensive sectors, notice that consumer staples and utilities, which are defensive sectors, were the weakest. This indicates that money is moving from defense to offense. PerfChart 3 shows the equal-weight sectors with similar characteristics.
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Chart 2
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Chart 3
SPY ZEROS IN ON 200 AS S&P 500 TARGETS 2000... There is a big magnet hanging over the S&P 500 at the 2000 level. This is equivalent to 200 for the S&P 500 SPDR (SPY). As Greg Schnell noted on Thursday, this milestone is just 1% away. Big round numbers are good to mark milestones, but they usually don't have much technical significance. Chart 4 shows SPY within a rising channel the last few years. I drew this Raff Regression Channel from the closing low in May 2012 to the closing high this month. I started from the May 2012 low because this is when the advance began its slow and methodical rise. Corrections were short and shallow, and each pulled was followed by a new high. A move to the upper trend line would target the 210-215 area, which could happen if this advance accelerates. The lower trend line of the rising channel and the April lows combine to mark the long-term support in the 180s. Pullbacks are considered corrections within an uptrend as long as this level holds. This means pullbacks are viewed as opportunities, not the beginning of a major reversal. Chart 5 shows the S&P 500 with support in the 1800 and CCI remaining positive since December 2012!
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Chart 4
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Chart 5
INFLATION IS EDGING HIGHER, BUT STILL CONTAINED ... The bond market may be getting nervous as the labor market improves, the economy continues to grow and inflationary pressures pick up. The economy and labor markets are covered below with the economic indicator table. The Consumer Price Index (CPI) surged in June and the annual rate was around 2%. The Fed, however, usually focuses on the Personal Consumption Expenditures price index (PCE). Chart 6 shows Core PCE expanding at around 1.5% annualized. Even though it is still well below the Fed's 2% threshold, the indicator has been rising this year and further increases could put upward pressure on Treasury yields, especially if the economy and labor markets continue to improve. Keep in mind that Treasury yields and bond prices have an inverse relationship. A rise in yields translates into a decline in prices. This chart was created with a user-defined index and a StockCharts Pro Account.
Chart 6
TREASURY BOND ETFS BACK OFF LONG-TERM RESISTANCE... Chart 7 shows the 20+ YR T-Bond ETF (TLT) forming a bearish engulfing at the trend line extending down from July 2012. Notice that TLT formed a lower high in early 2013 and then broke a major support level last year. Treasuries firmed the rest of the year and then moved higher in 2014, along with stocks. Something may need to give here. With the bearish engulfing, TLT is showing the first signs of giving in to selling pressure. A close below 110 would confirm the bearish engulfing. The indicator window shows weekly MACD edging below its signal line last week.
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Chart 7
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Chart 8
Chart 8 shows the 7-10 YR T-Bond ETF (IEF) breaking down with a 9.3% decline last year. I expected resistance near broken support and the 62% retracement, but IEF moved above 103 in late May and again in late June. These moves did not hold as the ETF fell back below 103 in early June and now in early July. A follow through close below 102 would confirm the bearish engulfing pattern and argue for a bigger support test in the 100 area. A break below the channel trend line would signal a continuation of the 2013 decline and project further weakness towards the 94-95 area. I am using the measured move methodology for this projection. The first decline was 9.3% and I am measuring a 9.3% decline from the channel high.
ECONOMIC INDICATORS SUPPORT LONG-TERM UPTREND IN STOCKS... A whole slew of economic indicators hit the market last week and they were all positive. Even though economic indicators may lag the forward-looking stock market, positive numbers support a long-term uptrend in the stock market. Moreover, it should be noted that the S&P 500 hit new highs in late February, early March, early April, late May, June and early July. In other words, the S&P 500 has pretty much been marching forward the entire year. First quarter economic numbers were fair, at best, yet the market hit a new high in March. Continued strength in the S&P 500 suggested that the economy and labor market were going to improve. And they did. First, notice that ISM Manufacturing and ISM Services were both above 55. Anything above 50 is supports economic growth and readings above 55 are quite strong. Second, auto sales hit 16.98 million units (annualized), which was the highest reading since July 2006. GM's cars may be stalling, but its stock is not. Third, the employment numbers were out of the park. ADP surged to 281,000 and non-farm payroll growth hit 288,000. Non-farm payrolls have been above 200,000 for five months and April was revised above 300K. Even though the stock market may seem overbought and ripe for a correction, these economic indicators clearly support a long-term uptrend in stocks. Below the table is a list of the economic indicators covered here at StockCharts.
Chart 9
