HOW FAR CAN THE S&P 500 CORRECT? -- NOTHING BULLISH ON SMALL-CAP CHART -- MID-CAPS REMAIN IN THE MIDDLE -- 20+ YR T-BOND ETF BOUNCES OF KEY RETRACEMENT -- COMPARING THE 2011 DOLLAR SHOCK WITH 2014 (PERFCHART DEMO) -- OIL FIRMS WITHIN DOWNTREND
HOW FAR CAN THE S&P 500 CORRECT?... Link for today's video. The S&P 500 is down less than 3% from its all time high and still in a long-term uptrend. Even though this week's decline could extend, it would take a lot more selling pressure to affect the long-term uptrend. As chart 1 shows, the index has experienced three declines greater than 4% this year (yellow areas). Note that these declines were measured from the intraday high to the intraday low. Also notice that these declines were rather sharp and lasted just two to three weeks. Another decline of 4.5% would carry the index to the 1930 area, which is another 40 points lower. Even though this would break the channel trend line, I would not turn long-term bearish unless the index breaks its early August low (call it a close below 1900).
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Chart 1
The first indicator window shows S&P 500 Net New Highs dipping into negative territory for at least the fourth time this year. Prior dips did not exceed the -2% level as selling pressure remains contained. The negative dip signals that new lows are outpacing new highs right now and the index is in corrective mode. Look for a break above +2% to signal a resumption of internal strength. The indicator window shows the AD Line hitting a new high in early September and remaining in an uptrend overall. The bottom window shows the S&P 500 outperforming the S&P 1500 as the $SPX:$SPSUPX ratio moved to a new high.
NOTHING BULLISH ON SMALL-CAP CHART... Small-caps continue to bear the brunt of September selling pressure and show relative weakness. In fact, John Murphy pointed out that small-caps are lagging large-caps by their widest margin in three years. Chart 2 shows the S&P Small-Cap 600 ($SML) peaking well below the summer high and reversing near the 62% retracement. The index is down around 5% this month and testing the early August low. In reality, however, the index closed below the 1-Aug close and this week's low is below the 2-Aug low. This means a lower low now goes with the lower high and a downtrend is underway. I will use the early September trend line and last week's high to mark resistance in the 665-668 area.
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Chart 2
The first indicator window shows Net New Highs reaching their most negative level since November 2012. New lows exceeded new highs the last four days and the indicator broke the -4% barrier, which is medium-term negative. This indicator will remain negative until a cross above +4%. The middle window shows the AD Line forming a lower high and breaking below its early August low for a downtrend. The bottom window shows the S&P Small-Cap 600 underperforming the S&P 1500. Simply put: there is nothing positive on this chart. A contrarian might view that as positive, but I prefer to wait for some bullish evidence.
MID-CAPS REMAIN IN THE MIDDLE... Moving one notch up the market-cap scale, chart 3 shows the S&P MidCap 400 with a potential double top brewing. The index reversed near the summer high and pulled back with what looks like a falling flag in mid September. Instead of breaking out, the flag continued to fall and the decline accelerated this week. The double top is as yet unconfirmed and it would take a break below the early August low to confirm this bearish reversal pattern. The trend remains up until confirmation. The indicator window shows Net New Highs moving to their most negative since June 2012 and breaking the -3% level. This indicator remains bearish until a move above +3%. The middle window shows the AD Line in an uptrend still and support is marked with the early August low. The bottom window shows the S&P MidCap 400 underperforming the S&P 1500 in September as the $MID:$SPSUPX ratio fell sharply.
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Chart 3
20+ YR T-BOND ETF BOUNCES OF KEY RETRACEMENT... This week's plunge in stocks put a bid into Treasuries as the 20+ YR T-Bond ETF (TLT) surged and kept the long-term uptrend alive. Chart 4 shows TLT retracing just over 62% of the July-August advance with a sharp decline in September. TLT reversed well above the early July low and the long-term trend is still up for TLT. I am also showing three exponential moving averages to help define the trend. The 20-day (blue) is above the 60-day (red) and the 120-day (green) is rising. I would mark key support at 112 and remain long-term bullish on bonds as long as this level holds. With the long-term trend up and the surge off a key retracement, TLT could be heading to yet another new high. The indicator window shows the 30-YR Treasury Yield ($TYX) in a downtrend this year. A break above the June highs is needed to reverse the downtrend in long-term yields. Chart 5 shows the 7-10 YR T-Bond ETF (IEF) bouncing off a support zone in the 102.5 area and the 10-YR Treasury Yield ($TNX) hitting resistance at the June highs.
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Chart 4
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Chart 5
COMPARING THE 2011 DOLLAR SHOCK WITH 2014... Long-term yields could move lower and long-term Treasuries could move higher because commodity prices in general are moving lower. I am not ready to sound the alarm on deflation, but the sharp decline in commodity prices certainly puts a damper on inflation, which is positive for Treasuries. PerfChart 6 shows the performance for the Dollar Index ($USD), the 20+ YR T-Bond ETF (TLT), the S&P 500 and the six GSCI commodity indices over the last 60 days (since July 1st). The Dollar is up over 6%, TLT is up over 5% and the five commodity indices are down rather sharply. I would attribute most of this to the "Dollar Shock". Even though the surge in the Dollar was not unexpected, the sharpness of the advance probably disrupted the commodity markets, especially oil and gold.
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Chart 6
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Chart 7
PerfChart 7 shows the same components for a 28 day period in 2011. I picked this period because the Dollar Index surged over 7% in less than six weeks, which is a massive move for a currency. The main commodity groups were also hit by this Dollar shock, as was the S&P 500. Treasuries benefitted from a slight to safety. Just to remind everyone, the European sovereign debt crisis hit in the summer of 2011. It was a rough couple of months, but stocks and oil found their footing and surged in October. In fact, the S&P 500 was up around 10% in the third quarter of 2011 and oil was up over 20%. I am not predicting the same right now, but both could move higher in the third quarter if the Dollar stalls and the shock wears off. Today's video demos a live PerfChart.
OIL FIRMS WITHIN DOWNTREND... It may be a little early, but I am noticing some firmness in oil, even as the Dollar continues higher. Note that the Dollar Index is up over 1% the last two weeks. During this same timeframe, gold is down around 1%, silver is down around 6%, copper is down around 2% and oil is up a fraction. Chart 8 shows November Light Crude (^CLX14) dipping below 90 on 10-September, bouncing back to 94 and testing the mid September low this week. Light crude is firming within a downtrend and I will be watching for a break above the red resistance zone to signal a reversal. The indicator window shows RSI trading in the 20-60 zone since early July. Momentum favors the bears as long as RSI holds within this zone. Look for a break above 60 to turn momentum bullish. Chart 9 shows the USO Oil Fund (USO) for reference.
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Chart 8
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Chart 9
ISM'S REMAIN STRONG, BUT HOUSING STALLS... The economy shows strength overall, but the housing sector remains a weak spot and employment growth has stalled. We are nearing the end of the month and this means the economic table is almost full. The month started strong as ISM Manufacturing and Services hit 59 and 59.6, respectively. Anything above 50 favors economic expansion and these readings are very strong. Motor vehicle sales exceeded 17 million on an annual basis and hit a multi-year high. Employment growth may be stalling because non-farm payrolls dipped to +142,000 and the 4-week average for initial jobless claims stalled around 300,000 this month. Retail sales continue to grow at a relatively tepid pace, but it is better to have modest growth than contraction. Housing remains the problem spot at housing starts and building permits dipped below 1 million. These disappointing numbers put a damper on the August surge in new home sales. One the whole, I think the economic indicators are more positive than negative. Retail sales remains the biggest question mark as we head into the fourth quarter. Chart 11 shows the Home Construction iShares (ITB) hitting resistance near the February trend line and falling around 4% this week. A break above 24.5 is needed to reverse the seven month downtrend.
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Chart 10
