WEBINAR CHARTS - KEEPING YOUR EYE ON THE TREND -- SMALL-CAPS AND MICRO-CAPS ARE STILL OK -- INDEX AD LINES HOLD SUPPORT -- HIGH-LOW PERCENT INDICATORS REMAIN BULLISH -- A NOT-SO-SURPRISING SMALL-CAP LEADER -- FOUR STRONG SMALL-CAP SECTORS
KEEPING YOUR EYE ON THE TREND... Link for today's video. These are the charts and commentary from Tuesday's Webinar (13-January). Trading has turned choppy in the major index ETFs since mid November, but sideways price action is not enough to derail the bigger uptrends. There are signs of risk aversion in the market and it is not hard to understand why. Europe is shaky, Greece is getting ready for elections, the price of oil has been cut in half, the Dollar is on a tear and bond yields are tumbling. What's an investor-trader to do? Short-answer: ignore the news and check the charts! These events have created uncertainty, but they have also created potential opportunities that can be found on the charts. In particular, small-caps are still looking good in general and the small-cap consumer discretionary sector just hit a new high. Perhaps there are opportunities in stocks with a domestic focus. Today's Webinar will focus on small-caps, the strong small-cap sectors, ITB, strong stocks in ITB and more.
Despite choppy trading the last two months, the major index ETFs are in clear uptrends on the weekly charts, which extend 36 months. Chart 1 shows the S&P 500 SPDR (SPY) hitting new highs in November-December and the blue oval shows a consolidation within an uptrend. Notice that broken resistance turned first support in the 200 area. The Raff Regression Channel, 52-week SMA and summer low mark key support in the 190 area. SPY could even pull back to the low 190s and still maintain its uptrend. Keep in mind that SPY is up some 80% since the summer of 2012 and entitled to a correction. Further more, I do not see a major topping pattern. After all, SPY hit a new all time high less than a month ago.
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Chart 1
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Chart 2
Chart 2 shows the Equal-Weight S&P 500 ETF (RSP) with a similar pattern. The indicator window shows RSP lagging SPY since summer, but the price relative did turn up in mid October and I would not become concerned unless this ratio breaks below the November lows (green dotted line).
SMALL-CAPS AND MICRO-CAPS ARE STILL OK... The Russell 2000 iShares (IWM) broke out in late October and this breakout is holding. Moreover, IWM hit a new high in late December. Again, a new high is bullish and I do not see a major topping pattern on this chart. The blue oval shows a consolidation after the breakout. Trading has been quite choppy since early November, but I would not consider this breakout a failure unless IWM closes below 112, which would break the mid December low. The indicator window shows IWM outperforming the S&P 100 ETF (OEF) since mid October.
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Chart 3
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Chart 4
Chart 4 shows the Russell MicroCap iShares (IWC) advancing from 45 to 80 and then correcting in 2014 with a decline below 67.5. In the grand scheme of things, a correction was warranted after the 2013 advance and the December breakout signals an end to this correction. More importantly, it signals a continuation of the prior advance. This breakout is considered valid as long as IWC holds 71 on a closing basis. The indicator window shows IWC outperforming SPY since early October.
INDEX AD LINES HOLD SUPPORT... Chart 5 shows the AD Lines for five major indices. The AD Line for the S&P 1500 ($SUPADP) represents the broad market (large-caps, mid-caps and small-caps). Note that all five hit new highs in late December to confirm the new highs in the underlying indices. Bearish divergences would warn of underlying weakness and there are not any bearish divergences working right now. Moreover, four of the five remain above their mid December lows, which are the first key levels to watch. The Nasdaq 100 AD Line is the weakest of the five because it was the only one to break its mid December low.
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Chart 5
HIGH-LOW PERCENT INDICATORS REMAIN BULLISH... Chart 6 shows High-Low Percent for five major stock indices and all five remain in bull mode. As a trend follower, I need a signal before turning bearish on the market. In other words, I need some evidence of selling pressure before expecting lower prices. -5% is the bearish threshold and I will remain bullish until a break below this level. Note that High-Low Percent for the S&P 500 and S&P MidCap 400 dipped below -5% in mid December, but High-Low Percent for the S&P Small-Cap 600 and Nasdaq 100 did not confirm. Three of the four should break the -5% threshold before turning bearish on the broader market.
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Chart 6
A NOT-SO-SURPRISING SMALL-CAP LEADER... PerfChart 7 shows year-to-date performance for the nine small-caps sectors. Anything stick out? The SmallCap Consumer Discretionary ETF (PSCD) is up year-to-date and showing relative strength. Also notice that the SmallCap HealthCare ETF (PSCH) is up year-to-date and shows relative strength. Note that this PerfChart is based on Monday's close and does not includes Tuesday's price action.
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Chart 7
Chart 8 shows a Relative Rotation Graph (RRG) with the nine small-cap sectors and the S&P 500 SPDR (SPY) as the benchmark. I clicked on the SmallCap Consumer Discretionary ETF (PSCD) in the table below to highlight the RRG line. Notice that the line was moving northeast for five weeks and then crossed into the leading quadrant. It has been in the leading quadrant for five weeks and is the top relative performer.
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Chart 8
FOUR STRONG SMALL-CAPS SECTORS... While the dramatic decline in oil prices adversely affected some industry groups, lower energy prices positively affected other industry groups. The million-dollar question: is the plunge in oil net positive or net negative? The plunge has clearly sent shockwaves through the market because it happened so fast. I think it is net positive because consumer spending drives some two thirds of GDP and the decline in energy prices is like a tax cut. Even if it is net negative, lower energy prices should benefit the consumer discretionary sector, which includes automakers, homebuilders, retailers and restaurateurs. This theme is not new. John Murphy wrote that the decline in energy prices was positive for retailers way back in mid November. The next four charts show the leading small-cap sectors.
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Chart 9
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Chart 10
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Chart 11
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Chart 12
ITB LEADS WITH NEW HIGH... Chart 13 shows the Home Construction iShares (ITB) taking the lead over the last few months. Note that John Murphy wrote about strength in homebuilders twice this year already. On the price chart, ITB advanced sharply in 2012 and then embarked on a choppy advance the last two years. The advance did continue in 2013 and 2014 because the ETF hit new highs in each year. Even though ITB sold off today, the ETF is starting off 2015 with a new high as well. I am not going to worry about the daily swings and will focus on the weekly chart for the overall trend. Broken resistance and the December low combine to mark support in the 24-25 area. The indicator window shows the ITB:SPY ratio turning up in early October and moving up the last few months.
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Chart 13
FIVE STOCKS FROM ITB... I am also covering the following charts in today's Webinar: LEN, FBHS, PHM, USG, RYL. For a taste, chart 14 shows Lennar (LEN) breaking neckline resistance from a large inverse head-and-shoulders pattern. Broken resistance turned support in the 42-43 area, and ultimately held in mid December. There is also a three step trading strategy on this chart. First, the big trend must be up, which it was after the mid October breakout. Second, chartists can use RSI to identify pullbacks and oversold conditions. Third, chartists can use StochRSI to signal a momentum upthrust, which suggests that the pullback is ending and the bigger uptrend is resuming. This strategy can help identify setups with a good reward-to-risk ratio.
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Chart 14
SEASONAL PATTERNS FOR $SPX AND $GOLD... The currents are quite mixed in the markets over the last three weeks. Treasury yields have plunged, oil remains weak, the Dollar remains strong, gold is up over the last two months and stocks have been choppy since mid November. Could stocks remain choppy longer? Chart 15 shows the seasonal tendencies for the S&P 500 over the last 20 years. Notice that the S&P 500 closed higher 55% of the time in January, which is the second lowest reading. Also notice that the average gain-loss for February is a loss. These seasonal patterns suggest that the stock market could be flat until March. Chart 16 shows the seasonal pattern for gold. Notice that gold gained an average of 2.1% in January and is up 55% of the time. February was also a positive month, but March has been a very negative month for bullion.
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Chart 15
