IJR AND QQQ CONSOLIDATE AFTER GAPS -- THE NEW HIGH PARADE -- LARGE-CAPS LEAD MARKET WITH NEW HIGHS -- SPX AND NDX BREADTH HELD UP THE BEST IN OCTOBER -- SPX AND NDX LEAD EXPANSION OF NEW HIGHS -- THE FIVE STRONGEST SMALL-CAP SECTORS
IJR AND QQQ CONSOLIDATE AFTER GAPS... Link for today's video. The S&P SmallCap iShares (IJR) and the Nasdaq 100 ETF (QQQ) gapped up on Friday and held these gaps all week. Even though these ETFs stalled and did not continue higher, the gaps are holding and the short-term trend is up as long as these gaps hold. Chartists can watch these gaps for the first signs of selling pressure that could signal a correction. I am using the term correction for a pullback because I think the bulk of the evidence is long-term bullish. This means declines are viewed as corrections within a bigger uptrend. The charts after this section show the long-term bullish evidence. In the meantime, chart 1 shows IJR with a gap above 110 and a consolidation the last six days. A consolidation forms when buying pressure and selling pressure equalize. It is just a stalemate waiting for a resolution. A break above 112 would signal an end to this consolidation and open the door to new highs. The gap zone marks support at 110 and a close below this level would be short-term bearish because it would make the gap and exhaustion gap. The indicator window shows the IJR:SPY ratio breaking a trend line as small-caps outperformed large-caps in mid October. This ratio flattened the last few week and a break above the red resistance line is needed to show relative strength again. Chart 2 shows QQQ with gap support marked at 100.
THE NEW HIGH PARADE... Even though stocks may be vulnerable to a pullback or consolidation after big moves, I think the long-term trends are up because so many indices, sector ETFs and AD Lines hit new highs. Below is a list of the new highs over the last 1-2 weeks. Of note, six of the nine sector SPDRs hit new highs, six of the nine equal-weight sector ETFs hit new highs and five of the nine small-cap sectors hit new highs. The majority of sectors in each category hit new highs and this supports an uptrend for the broader market. The technology, finance, consumer staples, healthcare and utilities sectors hit new highs in all three categories. There are pockets of weakness in the market (energy and materials), and the defensive sectors are showing relative strength, but the bulk of the evidence is net bullish for the stock market.
New Highs
- Major Stock Indices: $SPX, $SPXEW, $SPSUPX, $NDX, $INDU
- Index AD Lines: S&P 500, S&P MidCap 400, S&P 1500, Nasdaq 100
- Cap-weighted Sector SPDRs: XLK, XLF, XLI, XLV, XLP, XLV
- Equal-weight Sectors: RYT, RYF, RGI, RYH, RHS, RYU
- Small-caps Sectors PSCT, PSCF, PSCH, PSCC, PSCU
- Sector AD Lines: XLY, XLK, XLF, XLI, XLP, XLV, XLU
LARGE-CAPS LEAD MARKET WITH NEW HIGHS... Chart 3 shows the S&P 1500 in the main window and the four major indices in the indicator windows. The S&P 1500 is the proxy for the stock market as a whole. This broad index can be broken down into the S&P 500 (large-caps), S&P MidCap 400 and S&P Small-Cap 600. Notice that the S&P 1500, S&P 500 and Nasdaq 100 recorded new highs this week. Even though the S&P 1500 is a broad index with 1500 stocks, it is weighted by market cap and the largest stocks have the most influence. This means the S&P 500 dominates the S&P 1500. The S&P 500 and the Nasdaq 100 are large-cap indices and strength in these two favors large-caps over small and mid caps. Even so, the S&P MidCap 400 is within a few percent of its high and the S&P Small-Cap 600 broke channel resistance with a strong move in late October.
SPX AND NDX BREADTH HELD UP THE BEST IN OCTOBER... Chart 4 shows the S&P 1500 AD Line ($SUPADP) in the main window and the AD Lines for the S&P 500, S&P MidCap 400, S&P Small-Cap 600 and Nasdaq 100 in the indicator windows. Notice that four of the five AD Lines hit new highs this month. In addition, notice that the S&P 500 AD Line held its August low in mid October and the Nasdaq 100 AD Line held above its August low. These two AD Lines are perhaps the most important of the five because they did not break down in August and moved to new highs this month. The S&P SmallCap AD Line ($SMLADP) was trending lower from July to October, but broke out of its falling channel in late October and is poised to exceed the early September high.
SPX AND NDX LEAD EXPANSION OF NEW HIGHS... Chart 5 shows S&P 1500 High-Low Percent ($SUPHLP) in the main window followed by High-Low Percent for four major indices. Yep, these are the same four as above. First, notice that the trouble starts when S&P 1500 High-Low Percent moves below -5%, as it did in early October (1-Oct to be precise). An expansion of new lows in the S&P MidCap 400 and S&P Small-Cap 600 triggered this signal. Second, notice that this indicator turned bullish on October 22nd. An expansion of new highs in the S&P 500 and Nasdaq 100 triggered this signal. Third, notice that High-Low Percent is the highest for the S&P 500 and the Nasdaq 100 (green oval). Both are near 14% and these are the strongest indices of the five. Large-caps once again show the most strength.
THE FIVE STRONGEST SMALL-CAP SECTORS... The Russell 2000 iShares and the S&P SmallCap iShares have been lagging the S&P 500 SPDR and the Nasdaq 100 ETF all year. Despite relative weakness in these small-cap ETFs, there is plenty of strength as the sector level. In fact, note that five of the nine small-cap sectors recorded 52-week highs this week. These sectors include technology, finance, healthcare, consumer staples and utilities. This means the majority of small-cap sectors are in long-term uptrends and this is bullish for small-caps as a whole. Also note that the SmallCap Industrials ETF (PSCI) and the SmallCap Consumer Discretionary ETF (PSCD) broke above their early July trend lines and exceeded their early September highs. The SmallCap Materials ETF (PSCM) and the SmallCap Energy ETF (PSCE) are by far the two weakest sectors. Note that chart 6 was created with a StockCharts PRO account, which allows for ten different symbols and nine indicator windows.
ECONOMIC AND LABOR TRENDS REMAIN POSITIVE... The following economic indicator table was created in Excel and can be duplicated in any spreadsheet program or perhaps even MS Word. I am not using these indicators for trading signals and or to time the market. Instead, I am simply trying to determine if the economy, labor markets and housing are strengthening or weakening. An improving picture is positive for the stock market, while a weakening picture is negative. The first of the month is always choc full of economic reports and this week's reports were clearly positive for the economy. ISM Manufacturing and Services have been above 55 since May and show serious strength for both sides of the economy. Vehicle sales have been above 16 million since May and this reflects a normal annual rate for the auto industry. Initial jobless claims have been falling steadily since December and the ADP Report has averaged over 200K this year. All in all, the economic cup is clearly half full and these numbers do not suggest that a recession is around the corner. New highs in several stock indices also suggest that a recession is unlikely anytime soon.
