LARGE-CAP ETF'S LEAD UPSWING WITH NEW HIGHS -- SMALL-CAPS LAG, BUT TREND IS STILL UP -- TWO RISK INDICATORS REMAIN BULLISH FOR STOCKS -- ONE AD LINE DIVERGES FROM THE PACK -- BANK ETFS BREAK DOWN -- A BIG WEEK FOR ECONOMIC AND LABOR INDICATORS

LARGE-CAP ETF'S LEAD UPSWING WITH NEW HIGHS... Link for today's video. The S&P 500 SPDR (SPY) and the Nasdaq 100 ETF (QQQ) remain the strongest of the major index ETFs. SPY represents a broad basket of large-cap stocks, while QQQ represents a basket of large-cap tech stocks. This is where the money is flowing right now and they are the leaders. Chart 1 shows SPY with a big move over the last six weeks and a series of new highs the last three weeks. Even though the ETF seems overbought and ripe for a pullback, selling pressure remains limited and buying pressure continues to outpace selling pressure. I am watching Aroon Down for the first signs that a correction is unfolding. A bearish Aroon signal would unfold with two steps. Aroon Down crosses above Aroon Up and Aroon Down hits 100. This bearish signal would then remain in play until countered with a bullish signal, which triggers when Aroon Up crosses above Aroon Down and Aroon Up reaches 100. Should a bearish Aroon signal trigger, I would then look for support in the 200-202 area from the prior resistance zone. Chart 2 shows QQQ with similar characteristics.

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Chart 1

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Chart 2

SMALL-CAPS LAG, BUT TREND IS STILL UP... Chart 3 shows the S&P SmallCap iShares (IJR) with a Raff Regression Channel defining the current upswing. This channel extends from the closing low (13-Oct) to the closing high (26-Nov) of the move. The middle line is a linear regression, while the outer lines are equidistant from the furthest high or low. The channel will remain as is until there is a higher close, at which point I would extend the channel higher. The lower trend line and mid November low combine to mark upswing support in the 109-110 area, a break of which would reverse the upswing. The indicator window shows the price relative (IJR:SPY ratio) in a downtrend for most of 2014 as small-caps lag large-caps. A break above the red resistance zone is needed to reverse this trend in relative weakness. Chart 4 shows the Russell 2000 iShares (IWM) with similar characteristics.

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Chart 3

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Chart 4

TWO RISK INDICATORS REMAIN POSITIVE FOR STOCKS... Even though small-caps are lagging large-caps, two other risk indicators remain positive for stocks. Chart 5 shows the Equal-Weight Consumer Discretionary ETF (RCD) relative to the Equal-weight Consumer Staples ETF (RHS). I am using the equal-weight versions because they are more representative of the sectors as a whole. The cap-weighted SPDRs are dominated by large-caps because the top ten stocks in XLY account for around 40% and the top ten stocks in XLP account for over 60%.

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Chart 5

The equal-weight consumer discretionary sector has been underperforming the equal-weight consumer staples sector most of the year, but there have been periods of relative strength for the consumer discretionary sector. The consumer discretionary sector outperformed from June to August and from mid October until now. Relative strength in the most economically sensitive sector is positive for the economy because retail spending drives some two thirds of GDP. The RCD:RHS ratio moved above its late October high last week and I would stay positive on this indicator as long as the November low holds. Notice that a break down in late September preceded the October correction in SPY.


Chart 6 shows the Equal-Weight S&P 500 ETF (RSP) relative to the S&P 500 SPDR (SPY). RSP represents the average stock in the S&P 500, while SPY represents large-caps because it is weighted by market-cap. RSP has been lagging SPY for most of the year as the RSP:SPY ratio peaked in March and hit a new low in October. There were, however, periods of relative strength during this downtrend (green lines). RSP is currently in a period of relative strength as the ratio surged in October and held its gains the last six weeks. I am watching the mid November low for signs of a break down that would signal relative weakness in the average S&P 500 stock. Such a break down would signal risk-aversion in the stock market and could foreshadow a stock market correction.

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Chart 6

ONE AD LINE DIVERGES FROM THE PACK... Chart 7 shows the AD Line for the S&P 1500 in the main window and four other AD Lines in the indicator windows. First, notice that the S&P 1500 AD Line hit a new high last week and remains in a strong uptrend. This AD Line represents the market as a whole because it includes large-caps, mid-caps and small-caps. We can break down broad market breadth by looking at the AD Lines for the S&P 500, S&P MidCap 400 and S&P Small-Cap 600 individually. The first two hit new highs and show no signs of weakness. The S&P Small-Cap 600 AD Line, however, did not exceed its summer high and formed a small bearish divergence over the last few weeks. A bearish divergence forms when the underlying security records a higher high and the indicator forms a lower high, thus failing to confirm. While this is negative for small-caps, it has yet to weigh on the broader AD Line. I would, therefore, only be concerned with small-caps at this stage.

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Chart 7

BANK ETFS BREAK DOWN... The financial sector is the largest small-cap sector and two key banking ETFs broke down over the last two days. Note that the financial sector accounts for 22.74% of the S&P SmallCap iShares and 25.02% of the Russell 2000 iShares. Chart 8 shows the Regional Bank SPDR (KRE) bouncing off support in mid November, but failing to hold this bounce and breaking below its November lows today. This is enough to reverse the upswing and the break down is negative for IJR and IWM. The indicator window shows the Commodity Channel Index (CCI) turning bearish with a move below zero on Friday. Simple crosses above and below the zero line have defined the swings this year and I will abide by them until they stop working. Chart 9 shows the Bank SPDR (KBE) with similar characteristics.

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Chart 8

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Chart 9

A BIG WEEK FOR ECONOMIC AND LABOR INDICATORS... It is the beginning of the month and this means we will get a slew of important economic and labor reports. The table below shows the final tallies for the November reports with some notes on the right. Note that the October numbers are reported in November. This means we will be getting the November numbers starting this week. Overall, there is more green than red for the indicators related to the economy, labor, housing and inflation (positive than negative). The ISM Manufacturing and Services reports are very strong overall and comfortably above 50. ISM Manufacturing delivered another strong reading this morning. Despite an uptick in the 4-week average for Initial Jobless Claims, the labor market continues to improve in a steady manner. Retail Sales even ticked up and Housing Starts stayed above the 1 million mark. Inflation is in check with PCE prices showing very slow growth. I would call this disinflation and not deflation. Most important, there is nothing in these numbers to suggest that a recession is imminent. This table was created using an excel spreadsheet and most indicator data can be found at the St Louis Fed database.

Chart 10