S&P MIDCAP 400 IS KNOCKING ON THE DOOR -- MICRO-CAP ETF HITS MOMENT-OF-TRUTH -- S&P 500 AND NASDAQ 100 AD LINES SCORE NEW HIGHS -- HIGH-LOW INDICATORS SURGE -- MATERIALS SECTOR GETS A BREADTH SURGE
S&P MIDCAP 400 IS KNOCKING ON THE DOOR... Programming note: I am on the road today and there is no video. Getting the trend right is more than half the battle when it comes to trading and investing. Moreover, once we define the trend, it is important to respect that trend until the evidence suggests otherwise. There are hundreds of indicators out there and it can be a daunting task to separate the contenders from the pretenders. One rule, however, stands out among all others: price is the ultimate arbiter. By price, I mean the actual price chart and basic chart analysis. Indicators are secondary to price action and the underlying trend.
Chart 1 shows the S&P 500 in a clear uptrend with a lower trend line that was touched three times. Notice that 14-week RSI has been above 40 the entire uptrend (three years). It would take a move below 1900 in the index and 40 in RSI to reverse this long-term uptrend.
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Chart 1
The S&P 500 is not the only major index hitting a new high this week. The S&P 500 Equal-Weight Index, Nasdaq 100 and Dow Industrials hit new highs as well. Not just 52-week highs, but new all time highs. The S&P Small-Cap 600, Russell 2000 and S&P MidCap 400 continue to lag because they have yet to hit new highs, but they are less than 4% from their highs and performing well since mid October. Of the seven major indices just mentioned, four hit new highs this week and the other three are within a few percent of their highs. There is clearly more strength than weakness in the market right now. Chart 2 shows the S&P MidCap 400 challenging the July-September highs. Even though it is underperforming $SPX, it cannot be that weak if it is trading near its high.
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Chart 2
Charles Dow asserted that the length and duration of a trend are unknowable. In other words, I do not know how far this uptrend will extend and how long it will last. It will end when it ends. The best we can do is to identify the underlying trend and trade accordingly. Given the spate of new highs recently and confirming breadth indicators, I do not think this uptrend will reverse anytime soon. Tops are usually long draw out processes that take months to form. Chart 3 shows the S&P Small-Cap 600 breaking channel resistance and holding that breakout for three weeks. Even though $SML is underperforming $SPX, the channel breakout should be considered bullish as long as 650 holds.
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Chart 3
MICRO-CAP ETF HITS MOMENT-OF-TRUTH... Chart 4 shows the Russell MicroCap iShares (IWC) surging for three weeks and then stalling at the upper trend line of a falling channel for three weeks. This is a moment-of-truth for micro-caps. A breakout would signal follow through to the three week surge and also reverse the downtrend from the falling channel. The indicator window shows the IWC:SPY ratio in a downtrend since the March break down. This means IWC is lagging SPY and SPY remains the ETF of choice right now. A break above the August resistance zone is needed to signal relative strength and make micro-caps the ETF of choice.
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Chart 4
S&P 500 AND NASDAQ 100 AD LINES SCORE NEW HIGHS... Chart 5 shows the AD Lines for the S&P 1500 and four major indices. The AD Lines for the Nasdaq 100 and S&P 500 hit new highs this week and remain the leaders. Large-caps and large-cap tech stocks are the strongest right now and there are no signs of underlying weakness within these two indices. As noted before, a bearish divergence (non-confirmation) would show underlying weakness and there are no bearish divergences present. The S&P MidCap 400 AD Line also hit a new high this week. Combined with a new high in the S&P 1500 AD Line last week, this means four of the five AD Lines hit new highs this month. The S&P Small-Cap 600 AD Line is the weakest of the lot because it remains below its July high**. Note, however, that this AD Line broke the channel trend line and exceeded the early September high. Thus, while this small-cap AD Line is lagging the others, I think the medium-term trend is up and this is positive.
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Chart 5
HIGH-LOW PERCENT SURGES ... Chart 6 shows High-Low Percent for the same five indices. High-Low Percent equals new 52-week highs less new 52-week lows divided by total issues. High-Low Percent for the S&P 1500 surged in late October and early November, and then fell back over the last two weeks because of less strength in small-caps. Note that this broad market indicator turned bullish with the move above +5% (green line) and will remain bullish until there is a counter signal with a move below -5%. The indicator finished the week back above +10% with big moves in High-Low Percent for the S&P 500, S&P MidCap 400 and Nasdaq 100. High-Low Percent for the S&P Small-Cap 600 is the weakest of the lot and actually turned negative on Wednesday. This negative dip is a mild concern, but it is not outright bearish because we have yet to see a dip below -5%. Notice that $SML High-Low Percent was the first to dip below -5% and trigger a bearish signal in late September. We will likely get an early warning from this indicator if the broader market is going to turn down.
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Chart 6
MATERIALS SECTOR GETS A BREADTH SURGE... Chart 7 shows the AD Lines for the S&P 500 and the nine sector SPDRs. Note that I created this chart with a StockCharts PRO account, which allows for ten different symbols on one chart. This is just perfect for seeing all sectors on one chart. Six of the nine sector AD Lines hit new highs this week: consumer discretionary, technology, industrials, materials, consumer staples and healthcare. In addition, the finance and utilities sector AD Lines hit new highs earlier this month. I was especially impressed with the surge in the AD Line for the materials sector this month. It shot straight up and hit a new high. The energy sector AD Line remains the lone hold out and the weakest by far.
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Chart 7
INDUSTRIALS AND MATERIALS LEAD NEW HIGH LIST... Chart 8 shows High-Low Percent for the S&P 500 in the main window and High-Low Percent for the sectors in the indicator windows (all nine of them). There are two ways to use this. First, the sectors with the highest High-Low Percent values are the leaders. Obviously, those with the lowest are the laggards. Second, a sector is deemed bullish when High-Low Percent moves above +5% and stays bullish until a move below -5%, which is bearish. High-Low Percent is currently bullish for eight of the nine sectors. Notice that High-Low Percent exceeded +20% for seven sectors on Friday, which shows strong upside participation. High-Low Percent for the materials and industrials sectors surged above +25%. High-Low Percent for the energy sector broke below -5% in early September and has yet to break back above 5% to reverse this signal.
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Chart 8
TWO SMALL-CAP SECTORS WITH BULLISH BREAKOUTS... Chart 9 shows the SmallCap Consumer Discretionary ETF (PSCD) with a solid advance in 2012 and 2013, and a big consolidation in 2014. Big consolidations are tricky patterns because they are really neutral until a decisive break one way or the other. It looked like PSCD was going to break to the downside in October, but this break did not hold and the ETF surged back to the upper end of the consolidation. A breakout at 50 would signal an end to the consolidation and a continuation higher. Viewed another way, the 2014 consolidation looks like a massive flag after a big advance. A breakout, therefore, would signal a continuation of this advance. The indicator window shows the PSCD relative to SPY using the price relative (PSCD:SPY ratio). PSCD has underperformed since late December, but is starting to outperform as the ratio turned up and broke above the August high. Chart 10 shows the SmallCap Industrials ETF (PSCI) with a similar chart pattern. Notice that the PSCI:SPY ratio surged in October and then stalled at the August high. A breakout is still needed to signal relative strength.
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Chart 9
