MARKET RALLY CONTINUES -- RAILS LEAD TRANSPORTS HIGHER -- MMM LEADS INDUSTRIAL SPDR ABOVE 50-DAY LINE -- SMALL CAPS ALSO IMPROVE -- DIVIDEND PAYERS ATTRACT BUYERS ON FALLING BOND YIELDS -- VIX PLUNGES BACK BELOW 20 -- OVERSOLD FOREIGN SHARES REBOUND
RAILS LEAD TRANSPORTS HIGHER ... Not only are stocks extending their recent rally with a strong day, they're being led higher by economically-sensitive groups like transports. The daily bars in Chart 1 show the Dow Jones Transportation Average trading 2% higher today and trading above its 50-day moving average. Its relative strength line (above chart) is at a new high. Also impressive is the fact that rails are leading today's rally. Chart 2 shows CSX trading at a record high. Chart 3 shows Union Pacific (UNP) doing the same. That's a positive sign for the market as a whole.
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Chart 1
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Chart 2
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Chart 3
INDUSTRIALS SPDR ALSO CLEARS 50-DAY LINE... Another positive sign is coming from the ability of the Industrials SPDR (XLI) to clear its 50-day line, as shown in Chart 4. It is now trading at the highest level since the end of September. Also encouraging is the fact that it's relative strength ratio (top of chart) is turning back up for the first time since June. The XLI is getting some help from the rails. It's biggest gainer, however, is 3M which is surging more than 5% and nearing a new record high. Its relative strength ratio (above chart) has already surged to a new high.
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Chart 4
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Chart 5
S&P 500 NEARS TEST OF 50-DAY LINE... A week ago everyone was concerned about the S&P 500 falling below its 200-day average. It's now safely back above that long-term support line, and moving up to challenge its 50-day line (blue arrow). The SPX has made back more than 62% of its September/October price plunge. That's suggests that this rally may be more than just an oversold bounce. Also encouraging is the fact that the 14-day RSI line (above chart) is moving above its 50 line. In addition, daily MACD lines (below chart) have turned positive. I'm not quite ready to say that the market's intermediate trend has turned up. I am ready to suggest that its intermediate trend has gone from " down" to "sideways". That's still an improvement. It will have to exceed its early October/ mid-September highs to turn its trend back up again.
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Chart 6
SMALL CAPS ALSO IMPROVE... Small cap stocks have been a big drag on the overall market. Now they're improving as well. The daily bars in Chart 7 show the Russell 2000 Small Cap Index (RUT) rising above its early August low. The ability of an index to exceed a broken support level is usually a good sign. Its relative strength line (below chart) is also improving. It still has a long ways to go to turn its main trend back up again. For starters , the RUT will have to clear its moving average lines. It will also eventually also have to deal with the downtrend line drawn over its July/August highs. But its ability to rise above its 20-day average (green line) has improved its short-term trend.
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Chart 7
LOW RATES BOOST DIVIDEND PAYING STOCKS ... Not all of new money has been flowing into economically-sensitive stocks. In fact, a lot has been moving into dividend payers. The daily bars in Chart 8 show Dividend iShares (DVY) trading at the highest level in a month and well above its 50-day line. Its relative strength line (above chart) has surged over the last month as well. Part of that stronger performance is due to the fact that the DVY includes a lot of defensive groups like consumer staples and utilities which hold up better during a market correction. Falling bond yields, however, are also contributing. The upper green line shows the 10-Year T-Note yield (TNX) plunging from mid-September to mid-October. Falling bond yields increase the appeal of dividend-paying stocks which compete with bonds for higher yield -- like utilities and REITs which gained +4.2% and 5.8% over the last month (and have reached new highs). Utilities are also the biggest weighted sector in the DVY. Consumer staples gained 0.46% over the same time span, which still compares favorably to a -3.3% drop in the S&P 500. So investors aren't exactly jumping into riskier stocks with both feet. Some of that money is moving into more defensive groups that pay dividends.
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Chart 8
VIX TUMBLES ... During last week's market meltdown, the CBOE Volatility (VIX) Index surged to the highest level in three years. A rising VIX is associated with weaker stocks. Over the last week, however, the VIX has had one of its biggest drops in recent memory. Sustained moves above 20 have usually coincided with more serious market corrections. Chart 9 shows, however, that the VIX has fallen back below the 20 level -- and out of the danger zone.
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Chart 9
OVERSOLD FOREIGN STOCKS STABILIZE... The ability of foreign stocks to stabilize has also helped U.S. stocks. Chart 10 shows the Vanguard All-World ex-US ETF (VEU) bouncing off chart support along its early February low. Its 14-day RSI line (below chart) is also bouncing from an oversold condition (below 30). Unfortunately, the trend of the VEU is still down. As I suggested last week, the ability of foeign markets (especially in Europe) to recover from their recent tailspin will have a big influence on the ability of the U.S. stock market to reach new highs.
