MAJOR INDICES STILL CONSOLIDATING WITHIN UPTRENDS -- FINANCE AND TECH SECTORS HOLD NEAR HIGHS -- BANK OF AMERICA AND TYCO BREAK OUT -- RISING 10-YR BOOSTS BANKS AND HURTS REITS -- COPPER ETF REVERSES UPSWING
NIKKEI HITS SEVEN MONTH HIGH... Link for today's video. Despite some stalling over the last few weeks, the major stock indices remain in long-term uptrends. The S&P 500, S&P 500 Equal-Weight Index and the S&P 1500 all hit new highs in early September - and remain close to these higher. The key breadth indicators confirmed these highs as the S&P 1500 AD Line and S&P 1500 AD Volume Line also hit new highs last week. Outside of the US, note that the Shanghai Composite, Brazilian Bovespa, Indian Sensex and Eurotop 100 hit new 52-week highs this month and the Nikkei 225 hit a seven month high. US stocks could experience some short-term weakness or volatility, but I see nothing in the cards to suggest that a major top is at hand.
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Chart 1
MAJOR INDEX ETFS STILL CONSOLIDATING WITHIN UPTRENDS... Chart 2 shows the S&P 500 forming a higher low in early August and surging to a new high in late August. New highs are bullish - no if ands or buts about it. After a 5+ percent surge, the index was entitled to a rest and consolidated the last three weeks. A picture-perfect flag or pennant did not form, but this is clearly a consolidation within an uptrend, and such patterns have a bullish bias. The indicator window shows Net New Highs holding above the +2% level.
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Chart 2
Chart 3 shows the S&P MidCap 400 within a long-term uptrend that is defined by a rising channel. A move to the upper trend line would target 1500 by yearend, which is another 4.5% higher. I am not a big fan of targets, but the trend here is clearly up and favors further strength in the coming months. Short-term, the index surged in August and corrected in September with that looks like a falling flag. A move above 1440 would break flag resistance and signal a continuation of the August advance. The indicator window shows Net New Highs falling below he +3% threshold and this is normal during a pullback. A move back above +3% would signal renewed strength in this indicator. Note that I am using a 3% threshold because mid-caps are a little more volatile than large-caps and require more wiggle room.
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Chart 3
Chart 4 shows the S&P Small-Cap 600 ($SML) also within a long-term uptrend. Note the higher high in late June and higher low in early August. Even though small-caps are lagging large-caps and mid-caps, I am not too concerned because the big trend is up. Short-term, the index surged in August and corrected in September. Thursday's high now marks the first short-term resistance level to watch. A break above this high would reverse the short-term slide and signal a continuation of the August advance.
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Chart 4
FINANCE AND TECH SECTORS HOLD NEAR HIGHS... Five of the nine sector SPDRs hit new 52-week highs this month. More importantly, three of the four offensive sectors hit new highs. These include the Finance SPDR (XLF), Technology SPDR (XLK) and Consumer Discretionary SPDR (XLY). The Industrials SPDR (XLI) remains in a consolidation just below its summer high. Strong sector participation supports an overall uptrend in stocks. Chart 5 shows XLF consolidating above its July highs. A break below the late August low would be short-term negative and argue for a pullback within an uptrend. Chart 6 shows XLK with a similar pattern. I am watching these two quite closely because short-term support breaks in both would signal a correction that could extend to the broader market.
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Chart 5
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Chart 6
Chart 7 shows XLY breaking its late August low with a decline below 68.50 mid week. This could be a short-term negative, but it is clearly not enough to affect the long-term uptrend. Chart 8 shows XLI with a flat flag the last four weeks. Watch 54.5 up and 53.7 down.
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Chart 7
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Chart 8
BANK OF AMERICA AND TYCO BREAK OUT... Bank of America (BAC) stands out within the finance sector, while Tyco (TYC) stands out within the industrials sector. Chart 9 shows BAC getting its third breakout in four months. Also notice that upside volume has been strong since mid August. I featured BAC just after the first breakout on June third. Chart 10 shows Tyco bouncing off broken resistance and the 62% retracement in early August. The stock formed a falling flag into early September and broke out with a surge this week.
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Chart 9
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Chart 10
RISING 10-YR BOOSTS BANKS AND HURTS REITS... John Murphy wrote about rising yields in his Market Messages on Wednesday and Thursday. Yields continued higher on Friday as the 10-YR Treasury Yield ($UST10Y) blew through 2.55% and neared its late July high. This surge in yields is helping regional banks, but hurting REITs. Chart 11 show the Regional Bank SPDR (KRE) forming a large triangle over the last six months. This triangle follows a sharp advance and this advance makes it a bullish continuation pattern. An upside breakout would signal a continuation higher and open the door to new highs.
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Chart 11
The first indicator window shows the 10-yr Yield peaking in December and moving lower throughout the year. The nine month trend is still down, but the surge over the last few weeks is challenging this downtrend. The indicator window shows the Correlation Coefficient (KRE,$UST10Y) in positive territory over the last two years. This suggests that KRE and the 10-yr yield move in the same direction. Further upside in the 10-yr, therefore, would be bullish for KRE. Why? Because a rise in long-term rates could steepen the yield curve and banks are more profitable when the curve steepens. Banks borrow a short-term rates, lend at long-term rates and capture the spread. As John Murphy noted, this spread as narrowed over the last nine months, but the recent surge in the 10-yr Yield could signal that it is about to steepen again. Chart 12 shows the REIT iShares (IYR) falling over 3% this week and the indicator window shows a negative correlation with the 10-yr yield since June 2013.
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Chart 12
COPPER ETF REVERSES UPSWING ... Chart 13 shows the Copper ETN (JJC) failing at resistance and breaking the March trend line with a sharp decline this week. Copper accounts for one third of the Base Metals ETF (DBB) and this break down could weigh on the ETF. Note that copper remains in a long-term downtrend and this break down signals a continuation of that downtrend. Key resistance remains at 40 and a break above this level is needed to reverse the long-term downtrend. A break down in copper could weigh on the Copper Miners ETF (COPX) and other copper-related stocks. Chart 14 shows COPX failing to hold the summer breakout and moving below the March trend line. Unsurprisingly, COPX has a strong positive correlation with copper.
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Chart 13
