S&P 500 SPDR BOUNCES, SMALL AND MID-CAPS HOLD STRONG, CONSUMER STAPLES AND UTILITIES LEAD, TREASURY YIELDS SHOW RISK AVERSION, TLT HITS KEY RETRACEMENT
S&P 500 SPDR BOUNCES OFF SUPPORT ZONE... Link for today's video. Chart 1 shows the S&P 500 SPDR (SPY) falling to the top of its support zone last week and surging on Monday. This surge is most interesting because stock futures were down Friday and remained down until the open on Monday. I would chalk it up to short-term noise and keep an eye on the overall trend, which is clearly up. SPY surged in October-November and then formed a rising channel as the advance slowed. Even though the ETF is basically flat since late November, the rising channel shows that prices are moving in an upward trajectory (higher highs and higher lows). Today's bounce affirms support in the 202.5-205 area and I see no reason to turn bearish as long as this level holds. The indicator window shows the 125-day Rate-of-Change (six months) staying positive the last nine months. Actually, SPY has not seen a negative six month period since January 2012.
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Chart 1
SMALL AND MID-CAPS HOLD STRONG... While SPY tested the early March lows over the last two weeks, the S&P MidCap SPDR (MDY) and S&P SmallCap iShares (IJR) held well above these lows and showed relative strength. Chart 2 shows MDY surging above 275 with a gap five days ago and holding this gap for the most part. Last week's dip did not come close to the early March low as MDY held up much better than SPY. The trend here is clearly up and I am using a rising channel to define this uptrend. The early March low and lower trend line mark key support in the 265-270 area. The indicator window shows the price relative (MDY:SPY ratio) moving higher since mid October as MDY outperforms SPY. Mid-caps are preferred over large-caps right now. Chart 3 shows IJR with similar characteristics.
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Chart 2
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Chart 3
CONSUMER STAPLES AND UTILITIES LEAD... Two defensive sector SPDRs took the lead on Monday. Chart 4 shows the Consumer Staples SPDR (XLP) surging towards the January-February highs over the last few days. Overall, the ETF hit new highs in November-December-January and consolidated for a few months. The consolidation looks like a triangle within an uptrend and a breakout would signal a continuation higher. The indicator window shows the price relative (XLP:SPY ratio) moving higher the last few weeks as XLP outperforms SPY.
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Chart 4
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Chart 5
Chart 5 shows the Utilities SPDR (XLU) bouncing around the rising 200-day moving average in March and moving above 45 today. As noted last week, I think the long-term trend is up when looking on a weekly chart. According to the two factor approach, the ETF is above the 200-day moving average and the 200-day moving average is rising. This also suggests a long-term uptrend. The decline from 49 to 43, while deep, retraced 62% of the prior advance and held well above the prior low. This means a higher low is forming and the bigger uptrend may be resuming. The late March low and 200-day SMA can be used to mark first support. Note that the recent decline in Treasury yields is helping utilities because utilities and Treasury yields are negatively correlated. A subsequent upturn in yields and downtrend in Treasury bonds would be negative for utilities.
5-YEAR T-YIELD SHOWS RISK AVERSION... Despite a clear uptrend for the S&P 500, there are some signs of risk aversion in the market right now. Chart 6 shows the 5-year Treasury Yield ($FVX) plunging below the 14.5-15 area for the third time since October. The 14.5-15 area on the chart corresponds to a 1.45-1.5% yield. As the yellow areas show, sharp declines in the five-year yield correspond to weakness in the S&P 500. I suspect that this is some sort of risk on-off mechanism. A plunge in the 5-yr yield means money is moving into short-term Treasuries, which are viewed as safe-havens for risk-averse investors. A decline in Treasury yields also points to weakness in the economy and this could be negative for stocks. With the yield moving below 1.3% today, the risk aversion is clear and this is negative for stocks. The green dashed lines mark when the yield moved back above 1.5% in late October and again in early February. Look for a subsequent surge above this level to indicate that money is moving out of Treasuries and the market is embracing risk again.
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Chart 6
10-YR TREASURY YIELD EXTENDS LONG-TERM TREND... Chart 7 shows the 10-YR Treasury Yield ($TNX) moving below 1.85% (18.5 on the chart). The big trend is down and the immediate trend is down. The big trend extends the entire chart and this downtrend is marked with a red dashed line. The Raff Regression Channel defines the immediate downtrend with resistance around 2% (20 on the chart). Despite these downtrends, $TNX is in a potential reversal zone because the current decline retraced around 62% of the prior advance. If a higher low is going to form, I would expect it near current levels. Before taking this potential reversal zone seriously, we need some sort of upside catalyst to put in a higher low and reverse the immediate downtrend. Wait for a break above the late March high. Until such a break, the trends are down and lower yields are expected.
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Chart 7
TLT HITS KEY RETRACEMENT... There are some rather strange happenings in the bond market on Monday around mid day. The 7-10 YR T-Bond ETF (IEF) was trading up .14%, but the 20+ YR T-Bond ETF (TLT) was down .70%. These two almost always move in the same direction and weakness in TLT is something to watch. Chart 8 shows TLT in a long-term uptrend, but hitting the 62% retracement zone. The long-term trend is up with a new high in February and higher low in early March. TLT also broke out with the surge above 130 and this surge is holding. I am bullish, but watching this breakout zone closely. A move below 128 would negate the breakout and forge a lower high (below the February high). This would be a bearish development and target a move to the 118-120 area (next support). Chart 9 shows IEF with similar characteristics.
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Chart 8
