APPLE, MICROSOFT, AND CHIP STOCKS PULL TECHNOLOGY SECTOR LOWER -- EQUAL WEIGHTED NASDAQ AND TECHNOLOGY ETFS ARE NOT CONFIRMING RECENT ADVANCES -- EQUAL WEIGHTED S&P 500 ETF ALSO SHOWS RELATIVE WEAKNESS
APPLE AND MICROSOFT PULL TECHNOLOGY SECTOR LOWER... Heavy selling in Apple and Microsoft is pulling the technology sector lower today. Chart 1 shows Apple (AAPL) gapping down in morning trading. Chart 2 shows Microsoft (MSFT) trading lower as well. Since those two are among the biggest stocks in the technology sector (and the Nasdaq), they're having a negative impact on both markets. Semiconductor stocks, one of the weakest technology groups, have gotten even weaker. Chart 3 shows the SOX Semiconductor iShares (SOXX) falling another -3% today to the lowest level in six months. That sharp drop is being led by a -7% plunge in Linear Technology (LLTC) and -6% drop in Analog Devices (ADI). I've warned in a previous message that weakness in semiconductors is potentially negative for the entire technology sector which itself is on weak technical footing. Despite relative strength in large tech stocks (until today), market breadth paints a more cautious picture -- not just for the Nasdaq but for the market as a whole.
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Chart 1
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Chart 2
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Chart 3
EQUAL WEIGHT QQQ STILL BELOW JUNE HIGH ... Arthur Hill showed equal weighted indexes in yesterday's message, and I'm going to continue with them today. I do so because I think relative weakness in "equal-weighted" stock indexes and ETFs are painting a more cautious picture on the state of the stock market. I'm going to focus primarily on technology and the Nasdaq market first. Chart 4 shows the Power Shares QQQ Trust hitting a record high on Monday. That of course was powered by five of the largest weighted technology stocks in the Nasdaq that includes Apple (the biggest QQQ weighting at 14%), Microsoft (7%), Google (7%), Amazon.com (4%), and Facebook (4%). The last three have recently exploded into new highs. Chart 5, however, shows that the Nasdaq 100 Equal Weighted index (QQEW) is still trading below its June high. The cap-weighted QQQ has been rising mainly because of its five biggest stocks that comprise 30% of its value. By contrast, the equal weighted version in Chart 5 gives less weight to the bigger stocks, and may present a truer picture of the Nasdaq market. The negative divergence between the two ETFs is the widest in three years. That means that Nasdaq breadth is not keeping pace with its price rise. [In another sign of negative breadth, 105 Nasdaq stocks hit 52-week lows yesterday, while only 98 hit new highs].
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Chart 4
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Chart 5
EQUAL WEIGHT TECHNOLOGY ETF LAGS BEHIND... An even bigger divergence exists between the cap-weighted Technology Sector SPDR in Chart 6 and the Guggenheim S&P 500 Equal Weight Technology ETF in Chart 7. While the XLK in Chart 6 recently hit a record high, the RYT in Chart 7 is trading -5% below its spring high, and is threatening its 200-day moving average. There again, the RYT gives less weight to the large stocks and is a better measure of overall market breadth in the technology sector. The negative divergence between the two technology ETFs is the widest since last autumn when the Nasdaq lost -10% of its value on an intra-day basis.
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Chart 6
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Chart 7
EQUAL WEIGHT S&P 500 ETF ALSO LAGS BEHIND... The same negative divergence exists between the S&P 500 SPDRS (black line) and the Guggenheim S&P 500 Equal Weight ETF (RSP) which is the gray line in Chart 8. The equal weighted version remains well below the large cap weighted ETF. That's a sign of weaker market breadth. The RSP/SPY ratio in Chart 9 shows the negative divergence between the cap weighted and equal weighted ETFs at the weakest in two and half years, and the biggest drop since summer 2011. That's certainly a caution sign for the market, and raises doubts about the ability of the market to reach new highs and hold them. Especially when most other stocks are not keeping pace. [Note: Only 65 NYSE stocks hit new highs yesterday, while 192 stocks fell to new 52-week lows. How can a bull market continue when the number of stocks hitting new 52-week lows are three times bigger than number hitting new highs?]
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Chart 8
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Chart 9
NYSE ADVANCE-DECLINE LINE WEAKENS... Market breadth measures the degree of participation in a market uptrend. A rising market is stronger when most of its stocks are rising along with it. I recently showed, for example, that only 44% of NYSE stocks were trading above their 200-day average. That means that most big board stocks are in downtrends. [Only 36% are trading over their 50-day line]. The most traditional way to measure market breadth is with the NYSE Advance-Decline line. The AD line is simply a running cumulative total of NYSE stocks advancing minus those declining. In a healthy market, the AD line should be rising along with price indexes. That's not happening. Chart 10 compares the NYSE AD (red) line to the S&P 500 (daily bars). Both had been rising together since last October. The red line peaked in April, however, and has been dropping since then -- while the SPX is testing its old high. That negative divergence between the two means that the stock rally is being supported by fewer and fewer stocks. That's normally a caution sign, and warns that the stock market isn't as strong as the popular stock indexes are suggesting.
