MICRO-CAPS TAKE THE LEAD ON RELATIVE ROTATION GRAPH -- MICROCAP ETF BREAKS BIG CHANNEL -- HIGH-LOW PERCENT INDICATORS WHIP BACK TO BULLISH -- MINDING THE GAPS -- UTILITY ETFS BREAK OUT ACROSS THE BOARD -- SYMBOLS FOR SECTOR ETFS
MICRO-CAPS TAKE THE LEAD ON RELATIVE ROTATION GRAPH ... Link for today's video. Small-caps, mid-caps and micro-caps are starting to show some relative strength. John Murphy noted that the January effect was boosting small-caps as the Russell 2000 started outperforming the Russell 1000 recently. We can also see an improvement in small-cap performance on the daily Relative Rotation Graph (RRG). Chart 1 shows the RRG comparing the performance of eight indices against the S&P 500. Notice that the Dow Jones Microcap Index ($DJSM), the Russell 2000 and the S&P Small-Cap 600 are leading the way. All three RRG lines are green because they moved into the leading quadrant over the last two days. The S&P Mid-Cap 400 is in the improving quadrant and poised to move into the leading quandrant. You can read more about RRG in our ChartSchool.
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Chart 1
MICROCAP ETF BREAKS BIG CHANNEL... Chart 2 shows the Russell MicroCap iShares (IWC) holding support from the November lows this month and breaking above resistance with a surge this week. Overall, the ETF surged from November 2012 to March 2014 and then consolidated with a falling channel, which looks like a big correction. IWM surged to the channel trend line in October, stalled for a few weeks and broke out this week. This breakout is bullish as long as 72 holds on a closing basis. The indicator window shows the price relative (IWC:SPY ratio) forming a higher low in November and challenging the August high. A breakout would signal relative strength in IWC.
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Chart 2
HIGH-LOW PERCENT INDICATORS WHIP BACK TO BULLISH... I like to use the High-Low Percent indicator to measure underlying strength or weakness for the major index ETFs and the sectors. S&P 1500 High-Low Percent ($SUPHLP) is used as a gauge for the broad market and chart 3 shows this indicator triggering a bearish signal with the move below -5% on Tuesday. Also note that S&P 500 High-Low Percent ($SPXHLP) and the S&P MidCap 400 High-Low Percent ($MIDHLP) dipped below -5% on Tuesday. These signals, however, did not last long as all three came roaring back on Thursday and surged above +5% to turn bullish again.
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Chart 3
While I do not like to second-guess a signal, I think Tuesday's signals should be overlooked because energy stocks dominated the new low list early this week. Weakness in the energy sector stems from the plunge in oil prices and this is a very homogeneous sector. Moreover, lower energy prices are positive for other groups, especially the consumer discretionary sector. Over 30 energy-related names in the S&P 500 hit new lows this week and there were not that many new lows outside of energy. Note that 30 is 6% of 500 and this is why $SPX High-Low Percent dipped below -5%.
It is also worth noting that S&P Small-Cap 600 High-Low Percent ($SMLHLP) dipped into negative territory twice this month, but did not break the -5% threshold and held up the best. This is positive for small-caps and helps explain relative strength in December. Nasdaq 100 High-Low Percent ($NDXHLP) is the weakest because it did not move back above +5%.
FINANCE AND CONSUMER DISCRETIONARY SECTORS SHOW LEADERSHIP... Chart 4 shows the High-Low Percent indicators for the nine sector SPDRs and these sectors are ranked by the 10-day SMA of High-Low Percent. The utilities sector is far and away the strongest of the nine. XLU hit a fresh 52-week high on Thursday and was the only sector to hit a new high. The finance sector is second and the only other sector with a double digit 10-day SMA of High-Low Percent (14%). Healthcare and consumer discretionary round out the top four. Even though two of the top four sectors are defensive, I am impressed to see the finance and consumer discretionary sectors in the top four. Also note that these four sectors account for around 45% of the S&P 500.
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Chart 4
MINDING THE GAPS... After surging on Wednesday, the four offensive sectors surged again on Thursday with gaps and strong gains. As the next four charts show, these moves came after 52-week highs in late November and sharp corrections in early December. Actually, XLF hit a 52-week high in early December. New highs are bullish and news highs in these four SPDRs suggest that the bull market is doing just fine. The December decline, while sharp and exasperated by external events, returned these SPDRs to their prior highs and these areas acted as support. A basic tenet of technical analysis is that broken resistance turns into the first support area to watch. With the bounce the last few days, these SPDRs forged reaction lows (troughs) that can now be considered valid support. Chartists looking for an early warning can watch the gaps because a big gap and surge should hold. Failure to hold would show cold feet and could put the market back into its corrective funk.
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Chart 5
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Chart 6
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Chart 7
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Chart 8
UTILITY ETF'S BREAK OUT ACROSS THE BOARD... Utility stocks are under pressure on Friday, but the sector looks strong overall because it broke out in three different categories. Sector ETFs come in three flavors: large-cap, equal-weight and small-cap. The Sector SPDRs represent the large-cap sectors because their stocks come from the S&P 500 and the SPDRs are weighted by market-cap. The stocks in the equal-weight sector ETFs also come from the S&P 500, but market-cap does not count. The PowerShares small-cap sector ETFs use stocks from the S&P Small-Cap 600. A listing of these symbols is provided below. The utilities sector is the most impressive sector because all three ETFs are breaking out. Chart 9 shows the Utilities SPDR (XLU) breaking out and hitting a new high. Chart 10 shows the Equal-weight Utilities ETF (RYU) breaking flag resistance at 78. Chart 11 shows the SmallCap Utilities ETF (PSCU) breaking out of a flat flag. This is the only sector to hit a new high in all three categories.
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Chart 9
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Chart 10
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Chart 11
SYMBOLS FOR SECTOR ETFS... Sector SPDRS: SPY,XLY,XLF,XLK,XLI,XLB,XLE,XLV,XLP,XLU
Equal-weight Sectors: RSP,RCD,RYF,RYT,RGI,RTM,RYE,RYH,RHS,RYU
Small-Cap Sectors: IJR,PSCD,PSCF,PSCT,PSCI,PSCH,PSCC,PSCU,PSCM,PSCE
FORGET FED-SPEAK AND WATCH THE BOND MARKET... We can debate the nuances of the Fed statement and the thinking of Janet Yellen, but there is no debate on what is happening at the short end of the yield curve. Short-term Treasury yields are rising and pointing to a rate hike in 2015. Keep in mind that the bond market leads the Fed. This means Treasury yields start rising well before the Fed makes an actual rate hike. This makes sense because markets are forward looking beasts.
Chart 12 shows the 2-year Treasury Yield ($UST2Y) turning up in April 2013 and hitting its highest level since April 2011. The 1-year Treasury Yield ($UST1Y) is the dotted line and this yield turned up sharply in December. The sharp upturn in short-term yields suggests that money is moving out of short-term Treasuries, which are the ultimate safe haven. This money has to go somewhere and it looks like some of it hit the stock market over the last two days. The rise in short-term yields also indicates that the economy is doing fine and the Fed's next move will be to raise rates.
