EQUAL-WEIGHT TECH AND CONSUMER DISCRETIONARY ETFS LEAD -- S&P 500 NOTCHES ANOTHER NEW HIGH -- SMALL AND MID CAPS CONTINUE TO LAG -- BUT NEW HIGHS SURGE FOR SMALL AND MID CAPS -- HIGH-LOW PERCENT HITS A MILESTONE FOR 2014
EQUAL-WEIGHT TECH AND CONSUMER DISCRETIONARY ETFS LEAD... Link for today's video. There are certainly pockets of weakness in the stock market, but the stock market as a whole shows enough strength to keep the bull going and there were some notable new highs this week. John Murphy wrote about the new highs in the Retail ETFs on Thursday (XRT and RTH). On Friday, the Commerce Department reported a better-than-expected gain in October retail sales and University of Michigan sentiment hit a seven year high. This bodes well for retail as we head into the holiday season. Elsewhere, there were new highs in the Equal-Weight S&P 500 ETF, the Technology SPDR, the Finance SPDR, the Industrials SPDR, the Equal-Weight Consumer Discretionary ETF (RCD) and the Transport iShares. Throw in the S&P 500, Dow Industrials and Nasdaq 100 for good measure, and we have a pretty good group of new highs. The chart below shows the Equal-weight Technology ETF (RYT) hitting a new high. I am showing the equal-weight version because we cannot blame Apple for this new high, although the stock certainly did its part. Chart 2 shows the Equal-Weight Consumer Discretionary ETF (RCD) hitting a new high and the indicator window shows the XLY AD Line hitting a new high. As with many parts of the market, these two are overbought and ripe for a rest, but I would not consider them weak.
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Chart 1
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Chart 2
S&P 500 NOTCHES ANOTHER NEW HIGH... The market still favors large-caps because the S&P 500 is the only one of the big three to hit a new high. The S&P MidCap 400 and S&P Small-Cap 600 remain short of new highs, but both are less than 3% from 52-week highs. Chart 3 shows the S&P 500 with a failed support break in mid October and a huge surge the last four weeks. After a 12+ percent surge from low to high, the index is short-term overbought and ripe for a consolidation or perhaps a pullback. Timing a pullback is difficult, but broken resistance turns first support in the 2000-2010 area and I think this is the first area to expect a bounce on any pullback. I am going to put key support in the 1900 area for now. This area acted as support prior to the Ebola-induced break down and I will reinstate it for now.
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Chart 3
SMALL AND MID CAPS CONTINUE TO LAG... Chart 4 shows the S&P MidCap 400 surging over 13% and recovering its support break. I will reinstate this support level and keep a bullish bias as long as it holds. Further up, the gap and early November low mark first support zone in the 1400-1410 area. The indicator window shows the S&P MidCap 400 relative to the S&P 500. This ratio surged in mid October, but flattened over the last few weeks and failed to break out. Mid-caps continue to show relative weakness and a breakout is needed to signal relative strength.
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Chart 4
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Chart 5
Chart 5 shows the S&P Small-Cap 600 gapping above 670 and holding this gap for two weeks. I will mark first support in the 670-672 area. I am not exactly sure where to mark key support so will leave it off for now. The indicator window shows the $SML:$SPX ratio stalling at the August highs. No breakout yet and no relative strength for small-caps.
DESPITE RELATIVE WEAKNESS, NEW HIGHS SURGE FOR SMALL AND MID CAPS ... Even though the small and mid cap indices are lagging, the surge in new highs over the last few weeks is quite positive. Chart 6 shows the 15-day moving averages for new highs in the S&P 500, S&P MidCap 400 and S&P Small-Cap 600. These moving averages are at their highest levels of the year for $SML and $MID. Over the last three weeks, we have seen more new highs in $SML and $MID than at any time of the year. That seems bullish to me.
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Chart 6
HIGH-LOW PERCENT HITS A MILESTONE FOR 2014... Two key breadth indicators confirm underlying strength and suggest that a top is not imminent. A bearish divergence forms when the index moves to a new high and the indicator does not confirm. Such a divergence warns of underlying weakness and we are not seeing that right now. Small-caps and mid-caps may be under performing large-caps, but the next two breadth indicators suggest that, in aggregate, there is more strength than weakness right now. The absence of a bearish divergence reduces the chances of a significant top in the stock market.
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Chart 7
Chart 7 shows the S&P 1500 High-Low Line ($SUPHLP) moving back above its 10-day EMA on 23-Oct and High-Low Percent moving back above -5% on 22-Oct. The High-Low Line hit a new high this month as new highs expanded within the S&P 1500. In fact, there were over 300 new highs in the S&P 1500 on October 31st and there were over 175 new highs on Thursday. Over the last few weeks, the three week average for High-Low Percent is above 10 percent and at its highest level of the year. This is not a sign of underlying weakness.
AD LINE REFLECTS ENOUGH INTERNAL STRENGTH... Chart 8 shows the S&P 1500 AD Line ($SUPADP) with a breadth thrust in October and a surge to new highs in early November. This breadth thrust was pointed out in the Market Message on October 24th. Note that the S&P 1500 consists of the S&P 500, S&P MidCap 400 and S&P Small-Cap 600. Small and midcaps account for over two thirds of this index and the AD Line. A new high in the AD Line reflects broad participation and confirms the new high in the S&P 1500. The only negative here is that the index and the indicator are extended and ripe for a rest.
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Chart 8
T-BOND ETFS COIL UP TIGHT ... The Commerce Department reported a .3% rise in October Retail Sales and this was above consensus. A better-than-expected report would normally weigh on Treasuries, but the 20+ YR T-Bond ETF (TLT) firmed on Friday and even had a fractional gain in early trading. Perhaps the bond market is watching the oil market and the Dollar. A plunge in oil and surge in the Dollar dampens inflationary expectations and this is positive for bonds. Chart 9 shows TLT stalling at a rather interesting juncture. Notice that the ETF retraced 62% of the prior advance and returned to broken resistance with the move to 118. TLT has since consolidated with a rather tight range the last few weeks. I will be watching the November high and low for the next directional signal. A break above 120 would be bullish and a break below 118 would be bearish. Chart 10 shows the 7-10 YR T-Bond ETF (IEF) with similar characteristics.
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Chart 9
