RUSSELL 2000 ETF LAGS, BUT MAINTAINS BULLISH EDGE -- EQUAL-WEIGHT S&P 500 ETF HITS NEW HIGH -- OIL NEARS SUPPORT ZONE AND REMAINS OVERSOLD -- OIL & GAS EQUIP & SERVICES SPDR FIRMS NEAR KEY RETRACEMENT -- MERCK LEADS HEALTHCARE SPDR TO NEW HIGHS
RUSSELL 2000 ETF LAGS, BUT MAINTAINS BULLISH EDGE... There has been some concern that the Russell 2000 (small-caps) is lagging the Russell 1000 (large-caps). Relative weakness in small-caps detracts from a broad market advance because these stocks represent the appetite for risk and the high-beta end of the stock market. Despite relative weakness in small-caps, I would not become concerned unless IWM breaks channel support. Chart 1 shows the Russell 2000 iShares (IWM) trading within a big range this year (120 to 107). The black dotted line marks the middle of this range at 113.50, and IWM is just above the mid point and appears headed for the top of the range.
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Chart 1
Looking at the details, notice that IWM did forge a higher high in early July and held above its May low in early August. This range, therefore, has a slight upward bias. As noted at the beginning, I am focused on the immediate upswing, which is defined by the rising channel. I am marking support in the 113-114 area and will remain bullish as this channel holds. Relative weakness in small-caps is a concern, but not a big concern as long as the immediate uptrend holds. The indicator window shows IWM relative to the Russell 1000 iShares (IWB) using a ratio plot. The trend here is clearly down as IWM underperforms IWB.
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Chart 2
Chart 2 shows IWB hitting a new high this week with a 5+ percent surge. Overall, a rising channel is taking shape and the upper trend line extends to the 115 area over the next few weeks. IWB may be short-term overbought after the three week surge, but the trend here is clearly up and the bulls have the edge.
EQUAL-WEIGHT S&P 500 ETF HITS NEW HIGH... I am also not worried about relative weakness in small-caps because the Equal-Weight S&P 500 ETF (RSP) hit a new high to confirm SPY. Chart 3 shows the ETF finding support near broken resistance and surging to 78 this month. Note that the Equal-Weight S&P 500 ETF strips out the weightings and treats all S&P 500 components equally. This makes it a broad-based index that reflects the performance of the "average" stock. A new high is bullish and confirms the new high in SPY. This is kind of like the Dow Transports confirming the Dow Industrials in Dow Theory. The indicator window shows RSP relative to SPY using the price relative (RSP:SPY ratio). RSP is underperforming, but bullish investors are not be complaining too loud because the trend in RSP is up and it is trading at new highs. Elsewhere, chart 4 shows the S&P MidCap SPDR (MDY) closing in on its July high with a big surge in August.
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Chart 3
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Chart 4
OIL NEARS SUPPORT ZONE AND REMAINS OVERSOLD... Oil remains in a downtrend, but is nearing a long-term support zone and becoming quite oversold. Chart 5 shows Spot Light Crude ($WTIC) breaking wedge support in July and falling to the low 90s in August. With this decline, oil is now trading in the middle of its three year range (77 to 112). In fact, I would suggest that there is no long-term trend on this chart. Oil simply swings to and fro as the supply-demand outlook changes. The lows from November 2013 and January 2014 mark a support zone in the 92 area. Failure to hold this zone would argue for further weakness towards the mid 80s.
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Chart 5
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Chart 6
Chart 6 shows daily bars for more detail on the decline. Notice how the Commodity Channel Index (CCI) became oversold in early July and then dipped below -100 two more times. This is a classic case of becoming oversold and remaining oversold as the downtrend continued. I would consider momentum bearish as long as CCI remains in negative territory. A break into positive territory would provide the first sign that oil is getting an oversold bounce. Broken support turns into the next resistance zone in the 99 area.
OIL & GAS EQUIP & SERVICES SPDR FIRMS NEAR KEY RETRACEMENT... The decline in oil weighed on energy-related stocks over the six to eight weeks. The S&P 500 is trading near all time highs, but the Oil & Gas Equip & Services SPDR (XES) and the Oil Service ETF (OIH) remain well below their July highs. I am watching these two because a bounce in oil could translate into a bounce for XES and OIH. Chart 7 shows XES hitting a new high in early July and then falling around 10%. The ETF managed to firm in the 50-62% retracement zone. This zone also marks support from the April and May lows. The new high in July indicates that the long-term trend is up and the retracement amount is normal for a correction within an uptrend. It is time to watch XES closely because the ETF is bouncing off this support zone the last two days. I will be watching support at 44 for the first signs of failure. Chart 8 shows OIH with similar characteristics.
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Chart 7
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Chart 8
MERCK LEADS HEALTHCARE SPDR TO NEW HIGHS... Some big biotech stocks have been leading the stock market higher with big gains over the last few months. These gains have certainly helped the HealthCare SPDR (XLV), but the gains in XLV are not just from biotech stocks. Chart 9 shows XLV with the ten largest components. Notice that the top three components are big pharma stocks and together they account for over 25%. On the price chart, XLV found support near broken resistance in early August and surged to a new high. As with many stocks and ETFs, this three week surge has created short-term overbought conditions, but it has also affirmed the long-term uptrend. Chart 10 shows Merck (MRK) breaking resistance from an ascending triangle to signal a continuation of the bigger uptrend.
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Chart 9
