SMALL-CAPS CONTINUE TO UNDERPERFORM -- MID-CAPS AND MICRO-CAPS ALSO LAG LARGE-CAPS -- THREE MOMENTUM ETFS BREAK LOWER BOLLINGER BANDS -- WATCHING THE BREAKOUTS IN FINANCE AND INDUSTRIALS -- STEEL STOCKS LEAD METALS AND MINING ETF LOWER
SMALL-CAPS CONTINUE TO UNDERPERFORM... Link for today's video. September continues to be a rough month for mid-caps, small-caps, micro-caps and some of the high-beta groups. Overall, we have a bifurcated market with relative strength in large-caps and relative weakness in the other caps. Don't forget that large-caps account for around 92% of the total US stock market capitalization and small-caps account for around 8%. Relative weakness in small-caps, therefore, still represents a relatively small portion of the market as a whole. Elsewhere, we are seeing weakness in some momentum groups as internet, social media and cloud computing ETFs. As with small-caps, these groups represent the high-beta or riskier end of the market.
The Russell 2000 iShares (IWM), S&P SmallCap iShares (IJR), S&P MidCap SPDR and Russell MicroCap iShares show both relative and absolute weakness this month. They are not just underperforming, but they are under selling pressure and show losses this month. While the September declines could still turn out to be mere corrections, I will respect these immediate downtrends as long as they remain valid. Chart 1 shows IWM with two patterns at work. First, the higher low in early August and lower high in early September mark a large triangle consolidation. Second, the red trend lines define the September downtrend. With another lower high on Friday, I am lowering first resistance to 116. A break above this level would reverse the short-term downtrend and increase the chances of a triangle breakout, which would be long-term bullish. The indicator window shows the price relative sinking to new lows again as IWM underperforms SPY. Chart 2 shows IJR with similar characteristics.
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Chart 1
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Chart 2
MID-CAPS AND MICRO-CAPS ALSO LAG LARGE-CAPS... Chart 3 shows the S&P MidCap SPDR (MDY) peaking near the early July high and falling a couple percentage points. Notice that MDY made it all the way back to the July high in late August. In this regard, it shows more "chart strength" than IWM and IJR because both fell well short of their summer highs. The red trend lines define the September downtrend with Friday's high marking resistance. The indicator window shows the S&P MidCap 400 AD Line falling the last three weeks. Look for a breakout here to confirm any breakout in MDY.
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Chart 3
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Chart 4
Chart 4 shows the Russell MicroCap iShares (IWC) with a triangle forming over the last five months and a falling flag the last three weeks. A break below the lower trend line of the triangle would be long-term bearish. Short-term, the falling flag defines the immediate downtrend with resistance at 74. The indicator window shows IWC relative to IWM. Notice that small-caps are underperforming large-caps and micro-caps are underperforming small-caps. Relative performance just gets worst as we move down in market capitalization curve.
THREE MOMENTUM ETFS BREAK LOWER BOLLINGER BANDS... Last week I showed a chart of the Internet ETF (FDN) with Bollinger Bands and the BandWidth indicator. The Bollinger Bands were contracting and the BandWidth indicator was at its lowest level in months. The first assumption here is that a volatility contraction leads to a volatility expansion. The second assumption is that a signal triggers with the first Bollinger Band break. Well, chart 5 shows FDN breaking below the lower band with a sharp decline below 61 today. A close below the lower band would trigger a bearish signal that I would consider valid as long as FDN holds below last Friday's high (62.18). Chart 6 and chart 7 show the Cloud Computing ETF (SKYY) and Social Media Global ETF (SOCL) with similar characteristics.
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Chart 5
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Chart 6
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Chart 7
What exactly does the Bollinger Band break say? The middle line is a 20-day SMA and the bands are set two standard deviations above and below this moving average. A move below the lower band tells us that the decline was strong enough to push prices more than 2 standard deviations from this average. In a normal distribution, 95% of all observations appear within two standard deviations of the mean. A move that is more than two standard deviation from mean is deemed statistically significant.
WATCHING THE BREAKOUTS IN FINANCE AND INDUSTRIALS... The Finance SPDR (XLF) and the Industrials SPDR (XLI) broke out of consolidation patterns with sharp advances last week. This week I will be watching to see if these breakouts hold. A strong breakout should hold and a weak breakout will fold. I know it sounds obvious and simplistic, but sometimes a failed signal is just as valid. Chart 8 shows XLF breaking out with a surge above 23.5 last week and broken resistance turning first support in the 23.4-23.5 area. A move back below 23.4 would negate the breakout and show short-term weakness. Keep in mind that this is a short-term perspective. A failed breakout would not be enough to affect the long-term uptrend. Chart 9 shows XLI with broken resistance turning first support in the 54-54.25 area.
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Chart 8
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Chart 9
STEEL STOCKS LEAD METALS AND MINING ETF LOWER... The commodity rout continued unabated as the oil, industrial metals and precious metals fell in early trading on Monday. Selling pressure may be extending from Asia where the Shanghai Composite fell 1.7% and the Australian All Ords fell 1.29%. China represents a major source of demand, while Australia is a supply source. Chart 10 shows the Metals & Mining SPDR (XME) breaking down in early September and falling over 10% from high to low this month. The ETF may be oversold, but it remains under selling pressure and continues to show relative weakness. Notice that the price relative (XME:SPY ratio) broke down the first week of September. Chart 11 shows the Steel ETF (SLX) failing to hold its early July breakout and moving below support with a 2+ percent decline. The indicator window shows the price relative (SLX:SPY ratio) forming a lower high in early August and breaking below its June lows today. SLX is showing relative weakness along with its break down, and this is bearish.
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Chart 10
