SPY CORRECTS WITHIN WELL DEFINED UPTREND -- RISK INDICATORS TURNED MIXED -- JUNK BONDS GET SLAMMED AGAIN -- TREASURY YIELDS CONTINUE TO CONVERGE -- NEW HIGHS DRY UP, BUT BREADTH REMAIN BULLISH -- UTILITIES AND FINANCE STILL LEAD SECTOR BREADTH

SPY AND DIA CORRECT WITHIN WELL DEFINED UPTRENDS... Stocks were hit with intense selling pressure over the last few days, but these declines have yet to turn key breadth indicators bearish or even test major support levels. Today we will look at three major index charts, some key breadth charts, identify the strong sectors and spot light three stocks in a strong sector. Click here to view the Webinar video that goes with the charts in today's market message.

Chart 1 shows the S&P 500 SPDR (SPY) within a clear uptrend over the last three years. After hitting a new high in December, the ETF backed off the last two weeks with a move back to the 200 level. Is this enough to reverse the uptrend? I think not. I do not see a major distribution pattern or a top formation. The Raff Regression Channel, rising 52-week moving average and summer low mark support in the 190 area. I am drawing through the October spike because I think it was an overreaction, which the market seems prone to these days. The indicator window shows 14-period RSI in the 40-80 zone the last three years. A break below 40 would signal a turn in momentum. As long as the trend is up, dips into the 40-50 zone are deemed potential opportunities to partake in the bigger uptrend. Chart 2 shows the Russell 2000 iShares (IWM) hitting a new high and then pulling back the last two weeks. It may be a failed breakout, but it is still a new high and I still think there is more uptrend than downtrend on this chart.

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Chart 1

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Chart 2

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Chart 3

RISK INDICATORS TURNED MIXED... The next indicators show when the risk environment is positive for stocks or negative for stocks. There are some negatives out there, but I think the overall risk environment is still positive for stocks. Chart 4 shows the S&P Consumer Discretionary Sector ($SPCC) outperforming the S&P Consumer Staples Sector ($SPST) since mid October (risk positive). The indicator took a hit the last few days and a further weakness below the December low would signal a return to relative weakness in the consumer discretionary sector. This is the most economically sensitive sector and relative weakness would be negative for the stock market overall.

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Chart 4

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Chart 5

Chart 5 shows the S&P 500 Equal-Weight Index ($SPXEW) relative to the cap-weight S&P 500. The average stock in the S&P 500 is outperforming when this ratio rises and large-caps are leading when this ratio falls. The ratio has been rising since mid October and this shows good participation for the average stock in the S&P 500 (risk positive).

Chart 6 shows the Nasdaq 100 ETF (QQQ) relative to the S&P 500 SPDR (SPY) using a 5-day EMA of the QQQ:SPY ratio. QQQ led from early May to mid December, but lagged over the last few weeks (risk negative). Relative weakness in QQQ is a negative, but so far it is a short-term negative. A move below the November low might turn it into a long-term negative.

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Chart 6

JUNK BONDS GET SLAMMED AGAIN... Chart 7 shows the High-Yield Bond ETF (HYG) relative to the Investment Grade Bond ETF (LQD). According to the iShares website, 13.41% of the junk bonds in HYG come from the energy sector. The ratio broke down in July and trended lower the last six months. There is clearly risk aversion in the corporate bond market and this is risk negative for stocks.

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Chart 7

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Chart 8

Chart 8 shows the S&P 500 SPDR (SPY) relative to the 7-10 YR T-Bond ETF (IEF) using the 5-day EMA of the SPY:IEF ratio. This indicator hit a new high in late December and remains in an uptrend overall. This means SPY is outperforming IEF and stocks are outperforming bonds (risk positive). The indicator ratio turned down the last few days and broke below its 21-day EMA, but I would not become concerned on a medium-term basis unless it breaks the mid December low.

TREASURY YIELDS CONTINUE TO CONVERGE... Chart 9 shows the 10-year Treasury Yield ($UST10Y), the 5-year Treasury Yield ($UST5Y) and the 2-year Treasury Yield ($UST2Y) on the same chart. The decline in the 10-yr yield is a concern because it suggests that money is moving into long-term Treasury bonds, which are a safe haven. This decline, however, is offset by a rise in the 2-yr Treasury Yield since mid October. Notice that the 2-yr yield hit a 52-week high in late December. The upward bias in short-term yields tells me that the economy is doing fine and this is positive for the stock market. On a final note, the 10-yr and 2-yr are converging and this means the yield curve is "less" steep. The yield curve does not become a problem until there is an "inversion", which means the 2-yr would be above the 10-yr. We are not even close to having an inverted yield curve.

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Chart 9

NEW HIGHS DRY UP, BUT BREADTH REMAIN BULLISH... Chart 10 shows High-Low Percent for the S&P indices and the Nasdaq 100. After surging at the end of December, High-Low Percent fell back as new highs dried up over the last two days. We have, however, yet to see new lows expand and breadth remains bullish overall. In particular, I am impressed with High-Low Percent in the S&P Small-Cap 600 because it was above +10% for six of the last nine trading days of 2014. Also notice that this indicator did not dip below -5% in mid December, whereas High-Low Percent for the S&P 500 and S&P MidCap 400 did dip below -5%. At this point, I remain bullish on the market overall and would not turn bearish until I see another dip below -5%. Such a move would suggest that new lows are expanding once again and this would be negative for breadth.

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Chart 10

UTILITIES AND FINANCE STILL LEAD SECTOR BREADTH... Chart 11 shows High-Low Percent for the nine sector SPDRs and I am ranking the sectors according to the 20-day EMA of High-Low Percent. The top five sectors remain the same, but the order has changed. Utilities and finance remain the strongest sectors overall. Consumer discretionary moved up a notch third place. Consumer staples moved down two notches to fifth place. Healthcare moved up a notch to fourth place.

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Chart 11

XLU AND XLV LEAD SECTOR SCTRS... Chart 12 shows a screen shot from the sector summary page. I clicked the "SCTR" column heading to sort by this value. The Utilities SPDR (XLU) and the HealthCare SPDR (XLV) are the strongest sectors, and the only two above 90. Chart 13 shows XLU with a surge to new highs and a throw back to the breakout, which becomes first support. Chart 14 shows XLV with a bullish continuation pattern taking shape (triangle consolidation after an advance). Chart 15 shows XLF testing support from broken resistance.

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Chart 12

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Chart 13

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Chart 14

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Chart 15

THREE STRONG HEALTHCARE STOCKS...

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Chart 16

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Chart 17

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Chart 18

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Chart 19