MARKET TURNS MIXED AS SMALL-CAPS LAG -- IS RELATIVE WEAKNESS IN THE RUSSELL 2000 REALLY A PROBLEM? -- MARKING SUPPORT FOR THREE MAJOR INDEX ETFS -- AIR PRODUCTS LEADS MATERIALS SECTOR -- XLV HITS NEW HIGH AS PFIZER CHALLENGES RESISTANCE
MARKET TURNS MIXED AS SMALL-CAPS LAG... Link for today's video. As of Mondays close, November has been a mixed month for the stock market. The S&P 500 SPDR, the Dow Diamonds and the Nasdaq 100 ETF are up, while the S&P SmallCap iShares, Russell 2000 iShares and Russell MicroCap iShares are down. After showing relative strength in the second half of October, small-caps are showing relative weakness here in November. PerfChart 1 shows the performance for nine major index ETFs in the first half of October. Notice that IJR, IWM and IWC advanced more than SPY. PerfChart 2 shows the performance for November. Notice that these three are down and underperforming SPY. I am not too concerned because the major index ETFs were up sharply in early November and some sort of consolidation or pullback would be perfectly normal.
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Chart 1
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Chart 2
IS RELATIVE WEAKNESS IN THE RUSSELL 2000 REALLY A PROBLEM?... "It is known" that relative weakness in small-caps is negative for the broader market. That may have been true at some point, but the answer is not as clear-cut as it would seem. Using the Russell 2000 as a proxy for small-caps, we can see that small-caps have performed in line with the S&P 500 over the last 6.5 years. Chart 3 shows the $RUT:$SPX ratio with the Fibonacci Retracements Tool extending from the low to the high. This ratio is at the same level it was in the summer of 2008 and the autumn of 2009, which means small-caps have been flat relative to large-caps. The S&P 500 does not seem to be bothered with bouts of small-cap underperformance because it is up substantially over the last six years and recently hit a new high.
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Chart 3
The green and red lines show periods of relative strength and relative weakness. We are currently in a period of relative weakness for the Russell 2000. The ratio surged in October, but has yet to fully reverse this year's downtrend, which has been in place since February. So what does this means for investors and traders? It means large-caps are the place to be right now. This may change soon, but we have yet to see a breakout in the price relative (ratio chart). At its most basic, a ratio chart compares the performance of one asset against another and helps us decide which asset to choose.
MARKING SUPPORT FOR THREE MAJOR INDEX ETFS ... The major index ETFs surged over the last five weeks and this makes it challenging to mark support. Chartist do not have a trough to work with and trend lines are definitely too steep. I have opted to use gaps, broken resistance and the Raff Regression Channel to define support zones. I prefer support zones for ETFs and indices because they have dozens of moving parts (stocks). In a nutshell, the major index ETFs surged with gaps forming in late October and these gaps continue to hold, even for IWM. Chart 4 shows IWM with the gap, early November low and Raff Regression Channel marking support in the 115 area. A close below this support zone would be short-term negative and suggest that a correction is unfolding. The indicator window shows the IWM:SPY ratio flattening the last four weeks, but not turning up and remaining short of a breakout. A breakout is needed for IWM to start showing relative strength again.
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Chart 4
Chart 5 shows the Nasdaq 100 ETF (QQQ) moving to yet another new high today. Broken resistance, the gap zone, the early November low and the Raff Regression Channel mark a support zone around 100. The indicator window shows the QQQ:SPY ratio hitting a new high last week as QQQ outperforms SPY.
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Chart 5
Chart 6 shows the S&P 500 SPDR (SPY) breaking above its September high with a gap, stalling for a couple days and continuing higher the last two weeks. SPY hit yet another new high today. The Raff Regression Channel, broken resistance, gap and early November low mark support in the 200 area. I see no reason to turn negative on stocks as long as all three of these ETFs remain above support.
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Chart 6
AIR PRODUCTS LEADS MATERIALS SECTOR... Chart 7 shows the Materials SPDR (XLB) extending on its triangle breakout and recording a new high for the current move (mid Oct to mid Nov). Broken resistance in the 48.5 area turns first support to watch for a failed breakout. The indicator window shows High-Low Percent moving back above +5% on 4-Nov to turn bullish. This indicator remains bullish until a move below -5%.
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Chart 7
Chart 8 shows Air Products (APD), which is the 8th largest component of XLB, breaking out to a new high today. The pattern since late September looks like a cup-with-handle, which is a bullish continuation pattern. The indicator window shows APD outperforming XLB since summer.
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Chart 8
XLV HITS NEW HIGH AS PFIZER CHALLENGES RESISTANCE... Chart 9 shows the HealthCare SPDR (XLV) surging some 15% and then consolidating with a flat flag. The ETF broke flag resistance to signal a continuation higher and score another new high. The indicator window shows High-Low Percent holding above -5% during the October decline and moving back above +5% on October 21st. This indicator has consistently been above +20% and XLV remains one of the sector leaders. Chart 10 shows the HealthCare Providers ETF (IHF) breaking pennant resistance with a big move the last two days. Chart 11 shows the Medical Devices ETF (IHI) hitting a new high with a move above 110.
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Chart 9
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Chart 10
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Chart 11
Chart 12 shows Pfizer (PFE) breaking above the March trend line and challenging its July-September highs. A breakout here would fully reverse the 2014 downtrend and put Pfizer back in an uptrend. The indicator window shows the price relative (PFE:SPY ratio) flattening the last few months. A break above the September-October highs would show relative strength.
