S&P 500 HITS LONG VOLUME-BY-PRICE BAR -- S&P MIDCAP 400 FULFILLS DOUBLE TOP TARGET -- SMALL-CAP PRICE RELATIVE BOUNCES -- SECTOR ROTATIONS FAVOR DEFENSIVE SECTORS -- TWO SMALL-CAP SECTORS TO WATCH -- PLUNGE IN SHORT-TERM RATES SHOWS FLIGHT TO SAFETY
S&P 500 HITS LONG VOLUME-BY-PRICE BAR... On an intraday basis, the S&P 500 fell around 10% from its summer high to the mid October low. Even though a 10% decline may seem drastic, it still pales relative to the 50% advance from the November 2012 low to the September 2014 high. The S&P 500 advanced from 1350 to 2000 with several 4% to 6% pullbacks along the way. In fact, the last 10% decline was back in the summer of 2011, which is when the European sovereign debt crisis boiled over and the S&P 500 fell around 18% in just two weeks (25-Jul to 8-Aug). A period of gut-wrenching volatility followed as the index traded flat for the next two months and eventually bottomed in early October 2011. Chart 1 shows that the current decline is rather mild 10% in twenty days. On the bearish side, the index broke support from the early August low on Monday and Net New Highs are decidedly negative. Broken support turns first resistance and a move back above 1910 is needed to negate this support break. For potential positives, notice that the index bounced off the longest price-by-volume bar and the AD Line did not break its August low yet.
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Chart 1
S&P MIDCAP 400 FULFILLS DOUBLE TOP TARGET... Mid-caps have lagged the broader market since March, but showed sudden relative strength this week. Chart 2 shows the S&P MidCap 400 with a double top, a support break and a decline to 1270. The index pretty much filled the double top target with Wednesday's spike low. Broken support in the 1360 area turns first resistance to watch on an oversold bounce. Net New Highs turned bearish when they exceeded -3% on 26-Sep and remain bearish. The AD Line broke its August low this week, but not by much. I would watch for a break above the early October high to reverse the six-week downtrend. The indicator window shows the price relative ($MID:$SPSUPX ratio) hitting a new low last week and surging this week. It is still not quite enough to reverse the overall trend in relative weakness. Look for a break above the early September high for mid-caps to return to relative strength.
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Chart 2
SMALL-CAP PRICE RELATIVE SURGES... The S&P Small-Cap 600 is the only one of the big three to record a 52-week low this month. This 52-week low, however, did not last long as the index surged back above 620. The overall trend is still down after the big triangle break in late September. Broken support turns first resistance in the 640-650 area. A surge back above 650 is needed to negate this break down. Net New Highs turned bearish with the move below -4% on 23-Sept and remain bearish. The AD Line formed a lower high in early August and hit a new low early this week. The price relative ($SML:$SPSUPX ratio) provides the only potential bright spot as small-caps outperformed this week. The trend since March still shows relative weakness overall and a break above the August highs is needed to change this dynamic.
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Chart 3
SECTOR ROTATIONS FAVOR DEFENSIVE SECTORS... The chart below has a lot of moving parts so bear with me on this one. This is a Relative Rotation Graph (RRG) with the nine sector SPDRs, the nine equal-weight sectors and the nine small-caps sectors. I removed the energy sector ETFs because their underperformance skewed the graph. I am comparing performance against the S&P Total Market iShares (ITOT). The sectors with lines pointing northeast (up and towards the right are showing relative strength. Note that I removed the sectors that were not pointing northeast by unchecking the boxes below. Also note that you can click the sector to isolate it on the chart and click again to return to normal viewing mode.
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Chart 4
The sectors showing relative strength are in green. Here we can see all three utilities sectors, all three consumer staples sectors, the equal-weight and small-cap healthcare sectors and all three finance sectors. Utilities are clearly happy with the recent decline in Treasury yields. With the exception of the finance sector, the sector leadership right now is defensive and this favors a risk-off environment. The blue sectors show promise. Here we can see all three consumer discretionary sectors, the Small-Cap Technology ETF (PSCT) and the Small-Cap Industrials ETF (PSCI). The rest of the sectors show relative weakness.
TWO SMALL-CAP SECTORS TO WATCH... Chart 5 shows the SmallCap HealthCare ETF (PSCH) with a constructive pattern at work. The ETF surged in 2013 and consolidated in 2014. A consolidation after an extended advance is typically a bullish continuation pattern. The ETF fell from resistance with a falling channel the last few months (blue trend lines). A break above this channel would be bullish. The indicator window shows the price relative (PSCH:ITOT ratio) breaking the January trend line with a surge over the last four weeks. Chart 6 shows the Small-Cap Technology ETF (PSCT) bouncing off support this week.
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Chart 5
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Chart 6
YIELD CURVE HITS NEW LOW... The risk-off mood of the market surged to a new level this week as short-term Treasury yields broke down. John Murphy shows the 5-yr yield plunging and I will add the 2-yr Yield to the mix. Remember, Treasury yields and prices move in opposite directions. A plunge in yields implies a surge in prices, which means money moved into Treasury bills, notes and bonds. Short-term Treasuries yield next to nothing so a move into these instruments can only be seen as a flight to safety (risk off). Chart 7 shows the 10-YR Treasury Yield ($UST10Y) in a downtrend all year. The 2-year Treasury Yield ($UST2Y) and the 5-year Treasury Yield ($UST5Y) were in slight uptrends from January to September, but both broke down with sharp declines over the last few weeks.
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Chart 7
The indicator window shows the Yield Curve 10YR - 2YR ($YRC2Y) in a downtrend since January. The yield curve is still very positive and this is bullish for the economy. However, the 10-yr and 2-yr yields continue to converge and the yield curve is not as steep as it was at the beginning of the year. Regional banks would like to see a steeper yield curve because they make money by borrowing short-term, lending long-term and capturing the spread. The narrower the spread, the slimmer the profit margin.
SHORT-TERM TREASURY YIELDS PLUNGE... Chart 8 shows the 2-year Treasury Yield falling off a cliff in October and breaking below its August low. This means investors prefer the safety of a 2-year Treasury bond that yields less than one half of one percent to the stock market. This is clearly not a vote of confidence for stocks. The indicator window shows that the S&P 500 has been positively correlated to the 2-year Treasury Yield for most of 2014. A move back above .45% is needed to put this short-term yield back on the upward track. Such a move would be positive for stocks.
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Chart 8
ALUMINUM ETN HITS KEY RETRACEMENT ZONE... Chart 9 shows the Aluminum ETN (JJU) breaking out with a big move this summer and falling back to the breakout zone in September. Note that JJU hit a 52-week high this summer and the breakout appears to have reversed the long-term downtrend. The decline to 19 is viewed as a correction within a bigger uptrend. Notice how broken resistance and the 50-62% retracement combine to mark a potential reversal zone going forward. Chart 10 shows Alcoa (AA) bouncing off the rising 200-day moving average with a big surge on Friday.
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Chart 9
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Chart 10
GOLD SPDR HITS FIRST KEY LEVEL... Chart 11 shows the Gold SPDR (GLD) hitting the lower trend line of a falling channel and bouncing back to broken support. The big trend is clearly down and the first resistance level is nigh. Broken support and the 38% retracement combine to mark resistance in the 119-120 area. The indicator window shows Spot Gold ($GOLD) hitting resistance in the 1250 area.
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Chart 11
GOLD MINERS ETF FORMS SEVEN INSIDE DAYS... Chart 12 shows the Gold Miners ETF (GDX) trying to firm after a long white candlestick and big surge on October 8th. The ETF has done nothing since then because seven inside days formed. An inside day forms when the range is inside the range of the prior candlestick. The range of the last seven candlesticks has been inside the range of the candlestick on October 8th. A range break or move above 22 would be short-term bullish here. The indicator window shows the Gold Miners AD Line in a clear downtrend since July. Look for a move above the red resistance zone to trigger a short-term breakout.
