MAJOR INDICES BIFURCATE, EW S&P 500 STALLS IN TREND, IWM REMAINS IN UPTREND, MINDING THE GAPS, WEAKNESS WITHIN TECHNOLOGY, SEMIS WEIGH, HACK LOOKS VULNERABLE, WEBINAR FEATURES
MAJOR STOCK INDICES BIFURCATE ... Click here for the webinar recording. The stock market is still positive year-to-date, but we are starting to see some bifurcation in the major indices over the last few months. It is still not clear if these divergences will lead to a significant decline or if they are just part of the churning process. Year-to-date, the S&P 500 is up over 3% and the Russell 2000 is up over 4%. The Nasdaq 100 is the clear leader with the only double digit gain. As PerfChart 1 shows, the major stock indices are up year-to-date with most showing gains between 3% and 5%. The S&P 500 Equal-Weight Index ($SPXEW) and the Dow Industrials are the laggards because they are up less than 2%. Note that this PerfChart does not include Tuesday's data.
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Chart 1
The bifurcation can be seen when we look at performance over the one and three month timeframes. PerfChart 2 shows 3-month performance for these eight major indices. Notice that four are up and four are down, which makes for a split market. The S&P 500, Nasdaq 100, Dow Industrials and DJ Microcap Index are up, while the S&P 500 Equal-Weight Index, S&P MidCap 400, S&P Small-Cap 600 and Russell 2000 are down. This means small-caps and mid-caps have been lagging the last three months.
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Chart 2
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Chart 3
PerfChart 3 shows 1-month performance and the most bifurcation. The S&P 500, Nasdaq 100 and Dow Industrials are up, but the other five are down. Again, this PerfChart confirms relative and absolute weakness in small-caps and mid-caps over the last few months. This means money prefers large-caps over small-caps and mid-caps right now. It also suggests that if the market does turn down, small-caps and mid-caps will likely lead on the way down. The laggards on the way up often lead on the way down.
EQUAL-WEIGHT S&P 500 STALLS WITHIN UPTREND... The current bifurcation in the stock market is best seen when comparing the Equal-Weight S&P 500 ETF (RSP) and the S&P 500 SPDR (SPY). Each ETF has the same stocks, but they are weighted differently. RSP weights its components equally and SPY weights its components by market capitalization. Before comparing performance, let's look at the weekly chart for some perspective. Chart 4 shows RSP in an uptrend and hitting new highs in May, a mere two months ago. Also note that the 5-week EMA (pink) remains above the 52-week EMA (blue). The blue rectangle marks the range for 2015 and RSP is trading near the middle of this range. It has been a choppy range this year, but there is no break down visible on this chart. At this point, RSP is in an uptrend and I am still bullish. Two things would change my stance. First, the 5-week EMA would have to move below the 52-week EMA. Second, RSP would have to close below 77.5 on a weekly basis.
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Chart 4
The indicator window shows RSP relative to SPY using the price relative. Chartists looking for something bearish can easily find it right here. Notice that RSP has severely lagged SPY for over three months. The last time RSP lagged SPY for 3+ months was from June to September 2014. This gave way to the October decline, which proved short-lived. As a trend-follower looking for confirmation from the price chart, I will use the EMAs and support at 77.5 for a signal.
IWM REMAINS IN AN UPTREND... Chart 5 shows IWM hitting a new high in June and in a clear uptrend. First, the new high is indicative of an uptrend. Second, the 5-week EMA is above the 52-week EMA. Third, IWM has yet to break a prior low. The March-April lows and a buffer can be used to mark support at 118. I would not turn bearish on IWM unless it closes below 118 and the 5-week EMA moves below the 52-week EMA. The horizontal blue lines mark the 2015 range with the centerline marking the middle of this range. IWM is trading in the upper half of this year's range and the 2015 cup is still half full.
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Chart 5
The indicator window shows IWM relative to the S&P 100 ETF (OEF), which is small-caps relative to large-caps. Notice that IWM lagged significantly from March 2014 until September 2014. IWM then outperformed from October 2014 to March 2015. Relative performance has flattened the last few months as the ratio moved sideways.
MINDING THE GAPS... For those seeking a shorter perspective, the market provided us with big gaps on July 13th and these gaps are bullish as long as they hold. Chart 6 shows IWM pulling back around 5.7%, reversing and gapping above 124.5 on 13-Jul. This gap zone marks the first support zone to watch. A close below 124 would fill the gap and negate this surge-breakout. Chartists can also watch the Percentage Price Oscillator (PPO), which is above its signal line and positive right now. A move into negative territory would turn momentum bearish. Chart 7 shows SPY with gap support in the 207.5-209 area.
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Chart 6
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Chart 7
WEAKNESS WITHIN THE TECHNOLOGY SECTOR... Google, Facebook and Amazon did their part to lift the Nasdaq and Nasdaq 100 to new highs, but other parts of the technology sector are lagging and not partaking in the current advance. This fits with the bifurcation theme of the current market and this makes it a stock-ETF pickers market. This bifurcation is also the reason for weakness in the breadth indicators. Chart 8 shows the Equal-weight Technology ETF (RYT) breaking down with a sharp decline in late June. Also notice that the 10-day EMA moved below the 100-day EMA. RYT bounced with the market over the last two weeks, but is hitting resistance from broken support and remaining well below the May-June highs.
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Chart 8
The indicator window tells the real story though. As an equal-weight ETF, the EW Technology ETF represents the average technology stock in the S&P 500. The Technology SPDR (XLK), on the other hand, is weighted by market-cap and represents the large-cap technology stocks. We can compare these two with a price relative (RYT:XLK ratio). As the indicator window shows, this ratio plunged over the last few weeks as RYT seriously underperformed XLK. Combined with a break down on the price chart, I would be medium-term bearish on tech as a whole.
SEMIS WEIGH ON TECH SECTOR... Chart 9 shows the Semiconductor SPDR (XSD) failing to hold its triangle breakout with a sharp decline in late June. The ETF continued lower in early July and broke below the March-April lows. The 10-day EMA also broke below the 100-day EMA for the first time since early November. The indicator window shows the StockCharts Technical Rank (SCTR) moving below 40 as relative performance breaks down. 50 is the centerline for the SCTR, but I use 60 as my bullish threshold and 40 as my bearish threshold.
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Chart 9
HACK LOOKS VULNERABLE... Chart 10 shows the Cyber Security ETF (HACK) within an uptrend overall, but the bounce over the last two weeks looks rather feeble. HACK gapped up on July 9th, but did not gap up on July 13th, which is when QQQ and SPY produced their big gaps. Furthermore, the Percentage Price Oscillator (PPO) remains in negative territory and has yet to cross above its signal line. The 9-July gap is holding for now, but a move below 30.5 would fill the gap and negate the early July breakout.
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Chart 10
TIMELINE FOR WEBINAR RECORDING... Click here for the recording
