IJR AND QQQ WORK THEIR WAY HIGHER -- BREADTH INDICATORS IMPROVE FOR THE MATERIALS SECTOR -- RETAIL SPDR HITS NEW HIGH AHEAD OF KEY REPORT -- MARKETVECTORS RETAIL ETF SHOWS RELATIVE STRENGTH -- A MIXED BAG FOR APPAREL RETAILERS

IJR AND QQQ WORK THEIR WAY HIGHER... Link for today's video. Last week I featured the S&P SmallCap iShares (IJR) and the Nasdaq 100 ETF (QQQ) because both were holding their gaps and consolidating. After strong buying pressure and a big surge, buying pressure and selling pressure seemed to equalize as the ETFs moved sideways over the last few days. Or did they? I showed candlestick charts last week and this week I will show close-only line charts for a different perspective. On a closing basis, chart 1 shows IJR closing lower on Monday and Tuesday last week, and then closing higher the last four days. We can see this because the last four volume bars are green. Actually, the last five are green because the ETF is up in early trading on Tuesday. There is no evidence of a consolidation on the line chart because prices keep closing higher. IJR may seem overbought and ripe for a correction, but that does not guarantee a correction or consolidation. Chart 2 shows QQQ exceeding the September highs and closing at a new high.

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Chart 1

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Chart 2

BREADTH INDICATORS IMPROVE FOR THE MATERIALS SECTOR... The next two charts focus on the materials sector, which has been a laggard since late September. Chart 3 shows the Market-cap Weighted Materials SPDR (XLB) with High-Low Percent ($XLBHLP) in the indicator window. XLB surged in mid October, consolidated for a few weeks and broke triangle resistance with a surge the last four days. The broader market remains in bull mode and this sector may be poised to play a little catch up. The triangle lows mark key support in the 47-47.5 area. High-Low Percent surged above +10% and hit is highest level since mid September. In general, I view a break above +5% as bullish until countered with a break below -5%, which is bearish. There was a whipsaw in late October, but the indicator turned bullish last week. It will stay bullish until a move below -5%.

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Chart 3

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Chart 4

Chart 4 shows the Equal-weight Materials ETF (RTM) with the XLB AD Line ($XLBADP) in the indicator window. Even though XLB and RTM have the same components, they are different because XLB is weighted by market cap and RTM is an equal-weight ETF. On the price chart, RTM also broke out with a surge the last few days. The indicator window shows the AD Line moving back above its 20-day EMA in mid October and extending higher this month. I would stay bullish on RTM as long as it holds 81 and the AD Line holds above the late October lows.

RETAIL SPDR HITS NEW HIGH AHEAD OF KEY REPORT... The Retail SPDR (XRT) is still lagging the broader market, but the overall trend remains up and the ETF hit a 52-week high this month. Note that Retail Sales will be reported on Friday. XRT is a very broad-based ETF with 100 stocks. As chart 5 shows, the top ten stocks account for just 11.88% of the ETF and this means the weightings are pretty evenly spread. It is as good of a cross-section for US retailers as you will find. Even though XRT is barely positive year-to-date, the chart shows a series of rising peaks and rising troughs in 2014. This year's uptrend is certainly less steep than the 2013 uptrend, but it is still an uptrend and net positive for the broader market. At this point, I would mark key support in the 80-82.5 area and remain bullish as long as this level holds.

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Chart 5

The first indicator window shows the Percentage Price Oscillator (9,52,1), which measures the percentage difference between the 9-week EMA and the 52-week EMA. I chose the 9-week because it is around two months and the 52-week because it is a year. Even though upside momentum clearly slowed this year, it remains positive and the PPO has yet to dip into negative territory. Long-term momentum would clearly turn bearish should the PPO turn negative. The second indicator window shows XRT relative to SPY. The ETF started underperforming in late December 2013 and remains an underperformer. A break of the red resistance zone is needed to show relative strength.

MARKETVECTORS RETAIL ETF SHOWS RELATIVE STRENGTH ... Chart 6 shows the MarketVectors Retail ETF (RTH) breaking out in August, holding this breakout in October and surging to a new high the last few weeks. In contrast to XRT, this ETF shows relative strength because the price relative turned up in July and moved higher the last three months. RTH is outperforming SPY thanks to strength in Wal-mart (WMT), Home Depot (HD), Costco (COST), CVS Health (CVS) and Lowes (LOW). PerfChart 7 shows the performance for the top six stocks over the last three months. Notice that the five big gainers account for around 35% of the ETF. WMT is up over 5% the last three months, while the other four are up more than 15% each. Amazon is the big laggard with a 3+ percent decline.

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Chart 6

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Chart 7

A MIXED BAG FOR APPAREL RETAILERS... PerfChart 8 shows XRT and nine retail stocks. Eight are clearly apparel retailers and Macy's (M) is a department store that sells lots of clothes. Over the last three months, a few of the teen retailers were slammed with double digit losses in ANF, ARO and URBN. The discounters are the best performers with double digit gains in ROST and TJX. Macy's is down a fraction and Nordstrom is up around 4% during this period. This is clearly not an economic environment that will lift all boats. Instead, there will be winners and losers as the competition heats up. As far as the stock market is concerned, we just need the winners to outperform the losers to produce a net gain. The Retail SPDR (XRT) shows a net gain so far and I consider that more positive than negative.

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Chart 8

S&P SMALL-CAP 600 OUTPERFORMS RUSSELL 2000... The Russell 2000 seems to get all of the attention when it comes to small-caps, but it is a consistent laggard relative to the S&P Small-Cap 600. Chart 9 shows the S&P Small-Cap 600 relative to the Russell 2000 using a ratio chart ($SML:$RUT). Note that $SML outperforms when this ratio rises and $RUT outperforms when this ratio declines. There are two distinct periods on this chart. First, $SML seriously outperformed from early 2000 to late 2002, which was the aftermath of the dotcom bubble. Second, $SML has steadily outperformed $RUT since 2004 as the ratio simply worked its way higher over the last ten years.

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Chart 9

The indicator window shows the performance for the S&P Small-Cap 600 (red) and the Russell 2000 (black) since late 1999. $SML is up 274% and the Russell 2000 is up 162%. Wow, what a difference! Investors would have been much better off investing in the S&P Small-Cap 600. Even though past performance does not guarantee future performance, the current trend favors relative strength in the S&P Small-Cap 600 and chartists should take this into consideration when choosing a small-cap index.