SPY AND QQQ STALL ABOVE THEIR JULY HIGHS -- AMAZON, GOOGLE, QUALCOMM AND EBAY LAG -- GOOGLE DOES SHOW SOME IMPROVEMENT THOUGH -- RUSSIAN INDEX REVERSES AT SUPPORT BREAK -- 20+ YR T-BOND ETF WHIPS UP ON SPY -- ONLY ONE COMMODITY GROUP SHOWS STRENGTH
SPY AND QQQ STALL ABOVE THEIR JULY HIGHS... Link for today's video. Stocks took a breather this week as the S&P 500 SPDR (SPY) and the Nasdaq 100 ETF (QQQ) moved sideways after a strong open on Monday morning. Considering the negative geopolitical news this week, I am pretty impressed with the stock market's ability to hold its gains. Remember, the news is not what is important. Instead, it is the market's reaction to the news. A market that stays strong in the face of negative news is bullish. Chart 1 shows SPY surging above its July high and exceeding 200 this week. The ETF actually opened above 200 on Monday and then traded flat. Overall, SPY remains in a clear uptrend that is defined by a rising channel. The upper trend line extends to the 207 area in late September for the next upside target. The lower trend line marks first support and the June-August lows mark key support in the 190-192 area. The indicator window shows the S&P 500 AD Line ($SPXADP) hitting a new high this week and confirming the new high in the S&P 500. The absence of a bearish divergence (lower high) in the AD Line suggests that a major top is not in the cards right now. In other words, I would expect some internal weakness to foreshadow a major top and the internals remain strong.
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Chart 1
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Chart 2
Chart 2 shows QQQ within a steep rising channel since mid April. The upper trend line extends to the 105 area at the end of September. Broken resistance and the lower trend line mark first support. The July-August lows mark key support in the 94 area. A throwback to the 97 area might offer a second change to partake in this uptrend. The indicator window shows the Nasdaq 100 AD Line ($NDXADP) hitting a new high this week to confirm internal strength in the Nasdaq 100.
AMAZON, GOOGLE, QUALCOMM AND EBAY LAG... QQQ is heavily weighted towards its large-cap components because the top ten stocks account for around 45% of the ETF. While the other 90 stocks certainly influence performance, the top ten are clearly the main drivers. Chartists can analyze performance for these two using PerfCharts and Relative Rotation Graphs (RRG). Chart 3 shows performance for these ten stocks since mid April, which is when the big rally began. The gains in QQQ can be attributed to Apple (+39.65%), Microsoft (+14.41%), Google (+5.76%), Intel (+31.42%), Gilead Sciences (+57.71%) and Facebook (+24.99%). Google, however, is a bit of a laggard with the third smallest gain. Elsewhere, notice that Amazon (AMZN), Qualcomm (QCOM) and Ebay (EBAY) are lagging with sub-par performances.
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Chart 3
GOOGLE DOES SHOW SOME IMPROVEMENT THOUGH ... Chart 4 shows the weekly Relative Rotation Graph (RRG) for these ten stocks, and there are a few interesting observations here. First, notice that Apple moved into the leading quadrant 16 weeks ago (early May) and remained for 13 weeks. Second, notice that Cisco moved into the weakening quadrant and is on the verge of turning into a laggard. Third, notice that Amazon, Ebay and Google are in the improving quadrant. Chartists should watch these closely to see if they move into the leading quadrant, which would be bullish.
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Chart 4
Keep in mind that the graph above represents weekly data and a medium-term outlook. Chart 5 shows a daily Relative Rotation Graph (RRG) for more sensitivity. First, notice that Facebook moved into the lagging quadrant and Cisco has been in this quadrant. Second, notice that Amazon and QualComm are improving and moving closer to the leading quadrant. Third, notice that Google is relatively close to the center point. This means it would not take much to move Google into the improving quadrant and then into the leading quadrant. Bottom line: I am watching Cisco because it could turn into a laggard and I am watching Google because it could turn into a leader. You can read more about RRG in our ChartSchool
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Chart 5
RUSSIAN INDEX REVERSES AT SUPPORT BREAK ... The latest news from Russia-Ukraine is taking its toll on Russian stocks as the Russian Trading System Index ($RTSI) reverses course. Chart 6 shows the index breaking channel support with a sharp decline in July and then bouncing back in August. This bounce retraced 50% of the prior decline and stalled near the channel break. It looks like a lower high is forming and this week's decline signals a continuation of the bigger downtrend. This reversal targets a move towards the March lows, which implies another 10-15% lower. The indicator window shows RSI stalling in the 50-60 zone and turning down this week. Notice how RSI oscillates in the 40 to 80 zone during an uptrend and the 20 to 60 zone during a downtrend. Chart 7 shows the Russia ETF (RSX) with similar characteristics.
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Chart 6
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Chart 7
20+ YR T-BOND ETF WHIPS UP ON SPY ... The 20+ YR T-Bond ETF (TLT) moved to another new high this week and remains in a strong uptrend. Chart 8 shows TLT surging over 8% the last eight weeks. That is 1% per week! I am marking key support in the 112.50-113.50 area. TLT has outperformed the S&P 500 SPDR the last two months and year-to-date. SPY is up 9.36% since January 1 and TLT is up 18.89%, which is double the gain of SPY. Chart 9 shows the 7-10 YR T-Bond ETF (IEF) for reference.
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Chart 8
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Chart 9
ONLY ONE COMMODITY GROUP SHOWS STRENGTH... Despite a strengthening economy and improving labor market, long-term yields continue to fall and long-term Treasuries continue to rise. What gives? Perhaps long-term Treasuries are focused on a decrease in inflationary pressures. PerfChart 10 shows SPY, TLT and five GSCI commodity indices: the Energy ($GJX), Agriculture ($GKX), Precious Metals ($GPX), Livestock ($GVX) and Industrial Metals ($GYX). Four of the five commodity-related indices are down over the last two months. Energy is down around 8%, agriculture is down around 6%, precious metals down over 3% and livestock is down around 11%. This broad decline in commodity prices puts a damper on inflationary pressures and this is bullish for bonds. The industrial metals index is the only gainer. Note that John Murphy and I have written several times about strength in base metals over the last two months. This index includes aluminum, copper, lead, nickel and zinc. All but zinc have ETFs.
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Chart 10
TIP UNDERPERFORMS TLT AS INFLATIONARY PRESSURES DECREASE... Chartists can also measure inflationary expectations by comparing the Inflation-Protected Treasury ETF (TIP) to the 20+ YR T-Bond ETF (TLT). Chart 11 shows the TIP:TLT ratio as the black line and TLT as the blue dashed line. Inflation expectations are rising when the TIP:TLT ratio rises because this means inflation-protected Treasuries are outperforming. Inflation expectations are falling when the TIP:TLT ratio falls because this means inflation-protected Treasuries are underperforming. The TIP:TLT ratio peaked in late 2013 and moved sharply lower throughout 2014. Inflation expectations have fallen all year and TLT has risen all year. The indicator window shows the Correlation Coefficient to quantify this relationship. The ratio (TIP:TLT) has a strong negative correlation to TLT, which means they move in opposite directions.
