MARKETS REMAIN IN RISK-OFF MODE -- S&P 500 MOVES TOWARDS SUPPORT -- MID-CAPS BREAK SUPPORT -- SMALL-CAPS CONTINUE TO LAG -- INDUSTRIALS SPDR BREAKS KEY LEVEL -- CONSUMER DISCRETIONARY SPDR TESTS KEY LEVEL -- TECH AND FINANCE SPDRS ARE HOLDING UP THE BEST
MARKETS REMAIN IN RISK-OFF MODE... Link for today's video. The markets continue to shun risk and embrace safety, which means the markets are in risk-off mode. There are several metrics to we can use for this assessment. First, small-caps have broken down and are underperforming large-caps. The S&P 500 is still in a long-term uptrend, but the S&P MidCap 400 and S&P Small-Cap 600 have clearly broken down. Second, the defensive sectors are outperforming the offensive sectors. Also note that the Semiconductor SPDR joined the breakdown parade this week with a sharp decline. Third, commodities remain weak overall and the Dollar remains strong. Fourth, treasuries moved sharply higher over the last few weeks. It is as if the dominoes are falling one by one in the stock market, and the S&P 500 is the last, and biggest, domino standing. Even though the seasonal patterns are bullish for November and December, stocks are currently in corrective mode and October is living up to its reputation for volatile trading. It is hard to say how long this risk-off period will last. At the risk of sounding simplistic, it will end when it ends. In other words, we will start to see evidence on the charts. At this stage, we may need to see a selling climax of sorts to wash out all the sellers. Such a move could involve a dip below 1900 in the S&P 500 and a spike in bearish sentiment.
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Chart 1
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Chart 2
S&P 500 MOVES TOWARDS SUPPORT... Chart 3 shows the S&P 500 battling the February trend line with some wild swings above and below 1950 this month. October is certainly living up to its reputation as a volatile month. Despite a trend line break, the trend is still up on this chart as the index hit a new high in late September and has yet to break support in the 1900 area. A break below this level would forge a lower low and reverse the uptrend. Despite an uptrend, breadth is weakening as Net New Highs dipped below -2% for the first time since November 2012. The AD Line remains above its early August high and has yet to break down. At this point, I still view the Sep-Oct decline as a correction within an uptrend. A close above 1980 would signal an end to this correction and argue for a continuation of the uptrend. I would also look for Net New Highs to move back above +2% for confirmation.
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Chart 3
MID-CAPS BREAK SUPPORT ... Chart 4 shows the S&P MidCap 400 confirming its double top with a decisive break below support. John Murphy featured this pattern in his Market Message on October 1st. The support break signals that selling pressure was strong enough to push prices below the prior low, which marked an area of demand. Using traditional technical analysis, the height of the pattern would be subtracted from the support break for a target. A 6.7% decline from the 1360 area would target a decline to the 1270 area. Broken support turns into the first resistance level to watch for a potential bear trap. A surge above 1370 would call for a reassessment of this double top projection. In addition to the double top, Net New Highs have been negative since September 22nd and the index is underperforming the broader market (relative weakness).
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Chart 4
SMALL-CAPS CONTINUE TO LAG... Chart 5 shows the S&P Small-Cap 600 breaking support from a large symmetrical triangle and moving below the early August low. This triangle spans 10% and a similar decline from the support break would target a move to the 580 area. Broken support in the 640-645 area turns first resistance to watch for a bear trap. The indicator window shows breadth deteriorating even further as Net New Highs dipped below -10% again this week and the AD Line moved to a new low. Small-caps are also underperforming the broader market.
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Chart 5
INDUSTRIALS SPDR BREAKS KEY LEVEL... As noted in the Sector PerfChart above, the Consumer Discretionary SPDR (XLY) and the Industrials SPDR (XLI) are the weakest of the four offensive sectors. This means the Technology SPDR (XLK) and the Finance SPDR (XLF) are holding up better. Chart 6 shows XLI with a large double top in the making. The ETF is trading below support early Friday and a close near current levels would clearly break support. Net New Highs are turning negative and a break below -5% would be bearish for this indicator. The AD Line is testing the early August low and a break would signal the start of a downtrend in this breadth indicator. XLI is also showing relative weakness as the price relative moved to a new low with a sharp decline this week. On balance, things are looking bearish for XLI.
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Chart 6
CONSUMER DISCRETIONARY SPDR TESTS KEY LEVEL... Chart 7 shows XLY surging off support with a gap last week and then falling right back to the support zone this week. Ouch. This failed surge is negative and increases the chances of a support break. I would use the early October high to mark resistance. Net New Highs are deteriorating and hit -5% a few times this month. This means new lows are outpacing new highs. The AD Line has been flat since summer and is testing its support zone. Relative performance has flattened the last few months as the price relative moved sideways. However, this indicator is close to its recent lows and XLY does not show any relative strength.
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Chart 7
TECH AND FINANCE SPDRS ARE HOLDING UP THE BEST... Chart 8 shows the Technology SPDR (XLK) pulling back over the last few weeks and breaking the early February trend line. This pullback could still be a falling flag within a bigger uptrend, but the immediate trend is down and chartists can watch 40 for an upside breakout. The long-term trend is up because the ETF hit a new high just a few weeks ago and remains wabove its support zone. Breadth-wise, Net New Highs have yet to exceed -5% and the AD Line remains above its support zone. Also notice that XLK shows relative strength because the price relative (XLK:SPY ratio) broke out to new highs recently.
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Chart 8
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Chart 9
Chart 9 shows the Finance SPDR (XLF) hitting a new high in mid September and pulling back with a rather sharp decline the last few weeks. The ETF is nearing a potential support zone marked by A Fibonacci cluster zone. The blue ovals mark three lows and the Fibonacci Retracements Tools extend up from these three lows (to the Sept high). There are four Fibonacci retracements in the 22.5-22.75 area. Also notice that the consolidation from mid June to mid late July marks potential support here, as does the February trend line. This is an interesting area for the finance sector. The lower indicator window shows the finance sector outperforming the broader market since mid August.
SEMIS GET WALLOPED ... Chart 10 shows the Semiconductor SPDR (XSD) breaking support this week and then falling over 5% today. This is clearly not a good sign for the technology sector and, perhaps, the economy. The semiconductor business is quite cyclical and semiconductors feature in more and more "smart" products (cars, appliances etc....). Relative weakness in this key group could be a warning sign for the global economy. Even though the peaks are not exactly equal, they are close enough that I would consider this a double top.
