MACD HOLDS FOR IWM, QQQ FORMS CUP-HANDLE, FINANCE LEADS SMALL-CAPS, BROKERS LEAD FINANCE, TREASURY YIELDS SURGE, BUT DOES IT MATTER?, YIELD CURVE STEEPENS FURTHER, GOLD AND PALLADIUM BREAK DOWN, MINERS FOLLOW
MACD HOLDS BULLISH FOR IWM... Link for today's video. Chart 1 shows the Russell 2000 iShares (IWM) exceeding the late May high this week and keeping the uptrend alive. Even though IWM has yet to exceed its April highs, the chart is more bullish than bearish right now. I am marking first support with the last May lows and a buffer (122-123). A close below 122 would break support and call for a reassessment. The indicator window shows MACD above zero and above its signal line. Momentum is clearly bullish right now and the present is what matters most. A break below the signal line and move into negative territory would turn MACD bearish. So there you have it. I remain bullish as long as IWM is above 122 and MACD is positive.
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Chart 1
QQQ TESTS FIRST SUPPORT... Chart 2 shows the Nasdaq 100 ETF (QQQ) falling back from resistance and testing short-term support in the 109 area. Note that I view this as a short-term support level and would not turn medium-term or long-term bearish on a break. The only negative on the chart is a bearish signal line crossover in MACD, but MACD remains above the zero line. Overall, the evidence remains bullish with a potential cup-with-handle pattern taking shape. These are bullish continuation patterns that were popularized by William O'Neil of IBD. The May low forms the cup, the consolidation over the last 2-3 weeks forms the handle and rim resistance is set at 111. A breakout would signal a continuation of the long-term uptrend.
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Chart 2
TIMELINE FOR MARKET MESSAGE VIDEO... Total Time: 21 minutes and 44 seconds
00:00 to 02:03 - MACD Holds Bullish for IWM
02:04 to 03:35 - QQQ Tests First Support
03:36 to 05:19 - Small-cap ETFs have Strong SCTRs (live demo)
05:20 to 08:28 - Breadth Weakens, but has yet to Break
08:29 to 10:30 - Finance Sector Leads High-Low Percent
10:31 to 13:26 - Broker-Dealer ETF Leads Finance Sector
13:27 to 14:39 - Short-term Treasury Yields Surge
14:40 to 16:52 - Is the Stock Market Worried about Rising Rates?
16:53 to 18:24 - Yield Curve Steepens Further (live demo)
18:24 to 20:05 - Gold and Palladium Break Down
20:06 to 21:44 - Gold and Silver Miners Follow Gold
Link for today's video.
SMALL-CAP ETFS HAVE STRONG SCTRS... As far as relative performance is concerned, note that IWM has the third highest SCTR of 18 the broad market ETFs that I follow. Chart 3 shows a table with these ETFs and the one-week percentage change (as of Thursday's close). I am not including Friday, but this chart was created before the close and the numbers are subject to change. In any case, note that IWM, S&P SmallCap iShares (IJR) and Nasdaq 100 ETF (QQQ) are leading the major index ETFs with SCTRs above 80. According to the iShares website (ishares.com), financial services (23.33%) is the biggest sector in IWM. Information technology is second (18.2%) and healthcare is third (16.23%). Strength in the finance sector is helping small-caps.
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Chart 3
BREADTH WEAKENS, BUT HAS YET TO BREAK... The High-Low Percent indicators weakened across the board in April and May, but we have yet to see a noticeable uptick in new lows and the indicators remain bullish overall. Chart 4 shows High-Low Percent for the S&P 500, S&P MidCap 400, S&P Small-Cap 600 and Nasdaq 100. High-Low Percent is the number of 52-week highs less the number of 52-week lows divided by total issues. S&P 500 HiLo% ($SPXHLP) exceeded +25% in November-December, but did not exceed +20% in January-February-March and did not exceed +10% in April-May. The S&P 500 hit a new high in late May, but High-Low Percent is not keeping up and fewer stocks are participating in the advance. This is a concern, but it is not yet bearish because there are still more new highs than new lows. In other words, we have yet to see a strong enough uptick in selling pressure to push High-Low Percent below -5%, which is the bearish threshold.
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Chart 4
I set up this indicator group to generate either-or signals. Just like Dow Theory, it is either on a bull signal or a bear signal (HT Ari Wald). The High-Low Percent indicators are bearish when three of the four break below -5% and this signal remains in force until three of the four break above +5%. A bullish signal then takes hold and remains in force until three of the four move below -5%. I am using 5% buffers to reduce whipsaws. The system is not perfect by any means, but it helps keep me on the right side of the trend for the broader market, which is currently up. Of the four indicators, S&P 400 HiLo% ($MIDHLP) is the strongest because it exceed +10% twice in the last three weeks. The other three have not been above +10% since late March. It is a sign of less strength, but three of the four need to break -5% for an actual bearish signal.
FINANCE SECTOR LEADS HIGH-LOW PERCENT ... Chart 5 shows High-Low Percent for the nine sectors and I made an attempt to rank the sectors by this indicator. The horizontal lines are also at +5% and -5% to mark bullish and bearish shifts. Keep in mind that these are just indicators and they are meant to complement other analysis techniques. We are all aware that the healthcare and technology sectors have been leading the market for some time. The finance sector is also strong because High-Low Percent hit +20% on May 20th and exceeded +10% on June 3rd. Overall, healthcare, technology and finance represent 51% of the S&P 500.
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Chart 5
Elsewhere, I put the materials and consumer staples sectors in fourth and fifth place, respectively. Materials HiLo% ($XLBHLP) exceeded +10% several times in mid May and Consumer Staples HiLo% ($XLPHLP) exceeded +10% twice in mid May. High-Low Percent has weakened for the consumer discretionary and industrials sectors, but we have yet to see a bearish signal with a move below -5%. The utilities and energy sectors are the only two on bearish signals. Energy HiLo% ($XLEHLP) has been bearish since early March and Utilities HiLo% ($XLUHLP) has been bearish since February 27th. All told, seven of the nine sector High-Low Percent indicators are in bull mode and have yet to turn bearish.
BROKER-DEALER ETF LEADS FINANCE SECTOR... John Murphy noted the new high in the Bank SPDR (KBE) and strength in the insurance group on Thursday. We are also seeing continued strength in the Regional Bank SPDR (KRE) and Broker-Dealer iShares (IAI), which hit new high today. These two were featured in Tuesday's Market Message and Webinar Click here for recording. Here are just a few of the key stocks hitting new highs this week:
Morgan Stanley (MS)
Goldman Sachs (GS)
JP Morgan (JPM)
Charles Schwab (SCHW)
E*Trade (ETFC)
Interactive Brokers (IBRK)
Janus (JNS)
New highs are bullish and that's a nice list for the stock market. Chart 6 shows IAI breaking out back in early May, holding this breakout and surging this week. The StockCharts Technical Rank (SCTR) is above 95, which puts it in the top 5% for ETF performance (excluding leveraged and inverse ETFs). Chart 7 shows KRE moving above 43 and moving out of its rising channel. The ETF is up around 7% year-to-date and easily outperforming the S&P 500.
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Chart 6
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Chart 7
SHORT-TERM TREASURY YIELDS SURGE... The Labor Department reported a 280,000 increase in non-farm payrolls and this sent Treasury yields sharply higher, and Treasury bonds lower. Chart 8 shows the 2-year Treasury Yield ($UST2Y) bottoming in April 2013 and rising over the last three years. Volatility hit with two spikes above .70%, but each pullback formed a higher low and the trend in short-term yields is up. It is not a question of IF the Fed will raise rates, but rather WHEN. The bond market leads the Fed and the bond market is telling us to expect a rate hike. Chart 9 shows the 5-year Treasury Yield ($FVX) surging to a resistance zone extending back to the summer of 2013.
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Chart 8
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Chart 9
IS THE STOCK MARKET WORRIED ABOUT RISING RATES?... Chart 10 shows the 10-YR Treasury Yield ($TNX) in the main window and the S&P 500 in the indicator window with five significant moves highlighted in yellow. Overall, yields surged twice and the S&P 500 moved higher, and yields plunged twice and the S&P 500 moved lower. This indicates that there is a positive correlation between the 10-YR Treasury Yield and the S&P 500. Notice the green and red arrows. The last yellow highlight marks 2015 and the current surge in the 10-yr Yield.
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Chart 10
Here are the details. First, the 10-yr Yield surged from 2.4% to 3.6% and the S&P 500 surged around 200 points. Second, the 10-yr Yield plunged during the European sovereign debt crisis and the S&P 500 fell. Third, the 10-yr Yield plunged in April-May 2012 and the S&P 500 also fell sharply. Fourth, the 10-yr Yield surged during the famous taper tantrum of 2013 and the S&P 500 continued to work its way higher. During this taper tantrum, the 10-yr Yield surged from 1.6% to 3% and yet the S&P 500 did not decline. Sure, the gain was small, but keep this in mind before thinking that a surge in yields is bearish for stocks. The 10-yr Yield recently broke out near 2.3% and the next stop is 3%, which is well below the 2011 peak and still well below historical norms. Chart 11 shows an array of yields on one chart for comparison.
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Chart 11
GOLD AND PALLADIUM BREAK DOWN... John Murphy showed the Commodity Tracking ETF (DBC) breaking down on Thursday and we are also seeing breakdowns in gold and palladium. Gold is, of course, the king of precious metals. Palladium, on the other hand, is a precious metal with industrial uses, such as catalytic converters, which Tesla doesn't have. Chart 12 shows Spot Gold ($GOLD) in the top window and the Gold SPDR (GLD) in the bottom window. Gold formed a rising wedge from mid March to mid May and broke down with a decline over the last three weeks. Notice that the wedge retraced 50-62% of the prior decline. Both the pattern and the retracement amount are typical for bear market rallies. The wedge break signals a continuation of the prior decline and targets a move to new lows. The April-May lows mark resistance.
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Chart 12
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Chart 13
Chart 13 shows Spot Palladium ($PALL) with three break downs over the last eleven months. The metal hit a new low in late March, bounced into mid May and then broke down over the past week. This break down affirms resistance in the 800 area and keeps the downtrend in place.
GOLD AND SILVER MINERS FOLLOW GOLD... Chart 14 shows the Gold Miners ETF (GDX) breaking rising wedge support with a gap down last week and holding this break. This week's high marks first resistance, while the April-May highs mark key resistance. The indicator window shows the GDX AD Line ($GDXADP) hitting a new low this week. This tells us that there is broad weakness in the gold mining group. Chart 15 shows theSilver Miners ETF (SIL) hitting a new low in mid March, bouncing with a rising wedge and reversing at the 62% retracement. Commit this sequence to memory.
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Chart 14
