SETTING A YEAREND TARGET FOR THE S&P 500 -- SMALL AND MID-CAP INDICES HOLD THEIR CHANNELS -- SEASONAL EVIDENCE FOR THE JANUARY EFFECT -- NAT GAS CONSOLIDATES WITHIN DOWNTREND -- FIRSTTRUST NATURAL GAS ETF HITS SUPPORT ZONE
SETTING A YEAREND TARGET FOR THE S&P 500... Link for today's video. The S&P 500, S&P MidCap 400 and S&P Small-Cap 600 are all in uptrends, and the S&P 500 remains the clear leader. Even though one can interpret this as relative weakness in small and mid cap stocks, I do not see a real problem as long as all three remain in uptrends. After all, we have seen extended periods of relative weakness before (January to July 2012). At this stage, two things are possible. Either small and mid caps break down and drag large-caps down or small and mid caps catch a bid and start outperforming again. Recent history and seasonality suggests that small and mid caps may start outperforming in November or December.
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Chart 1
Chart 1 shows weekly bars for the S&P 500 over the last three years. Since the 8% correction in May-June 2013, the index has been rising in a slow and steady manner. Corrections have been limited to 4-6% and there have been five such pullbacks in the last 15 months. The pink line is the zigzag indicator set at 4%, which filters out price moves that are less than 4%. The S&P 500 is currently at a 52-week high and in a clear uptrend. The summer low and lower trend line of the rising channel mark support at 1900. The indicator window shows the Commodity Channel Index (CCI) moving into positive territory in December 2012 and remaining positive for over 18 months. Chartists looking for a yearend target can extend the upper trend line of the rising channel. The line hits the 2090-2100 area at the end of December.
SMALL AND MID-CAP INDICES HOLD THEIR CHANNELS... Chart 2 shows the S&P Small-Cap 600 working is way higher in 2014, but underperforming the S&P 500 over the last six months or so. A similar situation occurred in 2012 when the index underperformed from late January to late July (around six months). Despite relative weakness, the $SML moved higher during this period and did NOT reverse the uptrend. The index then accelerated higher as the price relative ($SML:$SPX) ratio broke out in December 2012.
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Chart 2
A similar setup could be emerging now. The price relative has been falling for around 6 months and the index is still in an uptrend. Key support is set in the 630-650 zone and the uptrend is valid as long as this level holds. A break below 630 would be bearish for the index and the market overall. Until such a break, $SML remains in an uptrend and chartists should watch for an upside breakout in the price relative. Such a move would signal relative strength in small-caps and this could foreshadow a surge in the index. Chart 3 shows the S&P MidCap 400 with similar characteristics.
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Chart 3
SEASONAL EVIDENCE FOR THE JANUARY EFFECT... The January effect is still a few months off, but this effect seems to get earlier and earlier. The January effect is the historical tendency for small-caps to outperform large-caps in January. There have been numerous studies on this subject. Simply Google "January effect small caps" for a slew of articles (without quoations). I particularly like the Fidelity article for its detail and quantitative approach. In short, tax-loss selling puts downward pressure on small-caps and these stocks are then bought again in January.
StockCharts users can also do a little research on this phenomenon by using the seasonality tool. Chart 4 shows the seasonal tendencies of the Russell 2000 (small-caps) relative to the Russell 1000 (large-caps) over the last twenty years. Anything jump out? Indeed, the Russell 2000 has a tendency to underperform in October, but a tendency to outperform in November and December. In fact, the Russell 2000 outperformed the Russell 1000 seventy four percent of the time in December and the average monthly outperformance was 1.8%. This seasonal tendency is even stronger over the last six years. Since the bull market began in 2009, the Russell 2000 has outperformed the Russell 1000 one hundred percent of the time in December. Today's video contains a live demo on using the Seasonality chart.
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Chart 4
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Chart 5
NAT GAS CONSOLIDATES WITHIN DOWNTREND... Chart 6 shows October Natural Gas Futures (^NGV14) forming a triple top and breaking down in July. Note that this chart looks different from Spot Natural Gas ($NATGAS) because it does not show a surge above 6 in February. This spike probably occurred because of some immediate supply issues that did not affect the futures market. When possible, I prefer to use the "tradable" instrument for chart analysis because it is based on market dynamics. Since breaking down, October Nat Gas has consolidated in the 3.75-4.1 area and chartists should watch these boundaries for the next directional clue. A break above 4.1 would be bullish, while a break below 3.75 would signal a continuation lower. Given the triple top break and bigger downtrend, the odds favor a support break at 3.75 and a continuation lower.
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Chart 6
FIRSTTRUST NATURAL GAS ETF HITS SUPPORT ZONE... As with other energy-related stocks, it has been a rough few months for the FirstTrust Natural Gas ETF (FCG). Chart 7 shows the ETF surging to new highs in spring, peaking this summer and then falling back to the January-March levels. Notice that there is a large consolidation in the 19-20 area and this area also marks a 50-62% retracement of the prior advance. The combination suggests that chartists should be on alert for an upside reversal and possible breakout.
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Chart 7
I would also watch natural gas prices because FCG has a strong positive correlation with Spot Natural Gas ($NATGAS). I am using spot nat gas in this instance because it has a longer price history. Also note that correlations are based on price changes and do not take the magnitude of the change into consideration. Correlation is +1 when the price change is in the same direction and -1 when price changes are in different directions. Unsurprisingly, the correlation between FCG and nat gas is mostly positive over the last few years. This suggests that an upside breakout in October Nat Gas would be positive and a downside break would be negative.
WATCHING INTERNET AND RETAIL CLOSELY... The next four charts come complete with annotations that explain the key technical features (as I see it, of course). They are weekly candlesticks charts covering two years. In particular, I will be watching the Internet ETF (FDN) going forward to judge the appetite for risk. A break down in the internet group would be negative for the technology sector. I am also watching the Retail SPDR (XRT) closely for clues on the retail environment. The ETF is holding up strong the last four weeks and trading near its 52-week high. Retail spending accounts for some 2/3 of GDP and continued strength in this group would bode well for the market overall.
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Chart 8
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Chart 9
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Chart 10
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Chart 11
CHARTING END-OF-DAY FUTURES CHARTS... Note that StockCharts carries end-of-day (EOD) price data for dozens of futures contracts traded on the CME and ICE. These all begin with a caret (^) so all you have to do is search for "^" in the symbol catalog (without quotation marks). The first letter or two is for the contract (B = $BRENT, CC = Cocoa). The letter before the numbers is for the month (V = October, X = November, Z = December). The numbers are for the year. It is usually best to analyze the closest month because it is usually the most active contract.
