UPTRENDS UNDER THREAT, BUT NOT REVERSED, SECTOR LEADERS ARE NEGATIVELY CORRELATED, CONSUMER DISCRETIONARY HOLDS THE KEY, HOUSING ETFS MAINTAIN UPTRENDS, RETAIL SPDR CONSOLIDATES WITHIN TREND, IS CORN FOR REAL?

UPTRENDS ARE UNDER THREAT, BUT NOT YET REVERSED... Link for today's video. The major stock indices are still in uptrends, but price action has flattened over the last few months. Nevertheless, the S&P 500 is still around 2% from its all time high, while the S&P Small-Cap 600 and S&P MidCap 400 are less than 5% from their all time highs. So while breadth has deteriorated and performance has flattened, I have yet to see bearish breakdowns that would actually reverse the current uptrends.

Chart 1 shows the S&P 500 surging to the May-June highs in mid July and falling back this week. Despite this pullback, the overall trajectory (trend) remains up. The index surged some 14% in October-November and then worked its way to new highs in May. One could definitely argue that trading has been flat since March because the index bounced between 2040 and 2140 the last five months (100 point range). At this point, we have yet to see a break down in this large-cap barometer. The rising 200-day moving average, Raff Regression Channel, March-May lows and a buffer mark support in the 2025-2050 area. A break below this support zone and a move below -5% in S&P 500 HiLo$ ($SPXHLP) would show a serious enough uptick in selling pressure to warrant a trend reversal.

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Chart 1

So, while the S&P 500 looks fine right now, chart 2 shows the S&P MidCap 400 with signs of weakness the last few weeks. Note that $MID did not make it back to June high during the mid July bounce and the ETF is already poised for a support test in the 1475 area. A close below 1470 would break support. A confirmation break below -5% in S&P 400 HiLo% ($MIDHLP) would be bearish.

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Chart 2

Chart 3 shows the S&P Small-Cap 600 in an uptrend right now. I cannot predict where this index will go, but I can identify the current trend and trade accordingly. The trend has been up since the October surge and there have been at least three pullbacks since late December. Even though $SML is showing relative weakness because it did not come close to its June high, it has yet to break support and forge a lower low. I will turn bearish when (if) $SML closes below 690 and High-Low Percent breaks -5%.

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Chart 3

These three stock indexes represent some 1500 stocks and a good cross section for the "stock market" as a whole. Even though price action has flattened and High-Low Percent is flirting with negative reading, we have yet to see actual bearish signals. Breakdowns in two of the three would tilt the weight of the evidence towards the bears.

SECTOR LEADERS ARE NOW NEGATIVELY CORRELATED... John Murphy and I have been writing about sector performance and how differing performance is keeping the market in check. In short, the industrials, energy, materials and utilities sectors are weak and weighing on the broader market. The consumer staples, consumer discretionary, healthcare and finance sectors are strong and keeping the market afloat. The technology sector is somewhere in between with strength in large-cap techs and weakness in non-large cap techs. The broader market will remain flat until something gives.

Chart 4 shows the Equal-Weight S&P 500 ETF (RSP) and the Correlation Coefficients for the nine equal-weight sector ETFs. Notice that the Correlation Coefficients for the EW Finance ETF (RYF), EW Consumer Discretionary ETF (RCD) and EW Healthcare ETF (RYH) are actually negative. These three sectors are negatively correlated to the Equal-Weight S&P 500 ETF over the last few weeks. This is because RSP has weakened and these sectors have remained strong. It is quite strange to see negative correlation in the finance and consumer discretionary sectors because these two usually have strong positive correlations to the broader market. The healthcare is a bit different because it is sometimes considered a defensive sector.

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Chart 4

WATCH THE CONSUMER DISCRETIONARY SECTOR... My eyes are on the consumer discretionary sector because it is the most economically sensitive sector of the nine. This sector includes retailers, restaurants, autos and housing. As the charts now stand, both the Consumer Discretionary SPDR (XLY) and the Equal-Weight Consumer Discretionary ETF (RCD) are in uptrends and doing just fine. Chart 5 shows RCD holding support in the 89-90 area since March and hitting new highs in late June and mid July. We can argue that the new highs did not hold and that the ETF has gone nowhere since early March, but it has yet to break down and the trend is in place until proven otherwise. The new highs are bullish and RCD is less than 2% from its last high, which was last week. Look for a break below support to prove this uptrend other wise. When the trend is up, I expect the trend to continue and higher prices to follow. A break below support would reverse this uptrend. Such a move would likely weigh on the broader market and tilt the sector balance towards the bears. Chart 6 shows XLY with an even stronger uptrend and key support in the 75-76 area.

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Chart 5

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Chart 6

HOUSING ETFS MAINTAIN UPTRENDS... I am also watching four industry group ETFs for clues on the consumer discretionary sector, the US economy and the broader market. These ETFs relate to housing and retail, two very important segments of the US economy. As the charts now stand, housing and retail are holding up and have yet to break down. Chart 7 shows the Home Construction iShares (ITB) surging in October-November and then embarking on a steady uptrend since December. The ETF has yet to exceed its April high, but this is not enough to call for a downtrend. The December trend line and June low mark support in the 26-26.5 area. The indicator window shows the SCTR moving above 80 and holding above 80 the last four weeks. Chart 8 shows the Home Builders SPDR (XHB) hitting a new high in late June and holding its uptrend. The SCTR has been above 80 since the second half of May.

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Chart 7

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Chart 8

RETAIL SPDR CONSOLIDATES WITHIN TREND... Chart 9 shows the MarketVectors Retail ETF (RTH) holding support in the 74 area and breaking out with a big move in mid July. Note that this breakout occurred before Amazon's pop and this chart was featured in the Market Message on June 30th with resistance at 77. The breakout and new high are bullish for this ETF and positive for the retail group.

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Chart 9

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Chart 10

Chart 10 shows the Retail SPDR (XRT) for a broader look at the retail group. Note that XRT has some 100 stocks and the holdings are weighed more equally. This makes it a great barometer for the US retail industry. XRT is still in an uptrend, but this trend has flattened as a consolidation takes hold. The resolution of this triangle will provide the next directional clue. An upside breakout would keep the uptrend alive and open the door to new highs. Failure to break out and a break below support at 97 would be bearish. Note that the SCTR is holding up fairly well in the mid 70s.

IS CORN FOR REAL?... Most commodities are in downtrends and many are near 52-week lows. Spot Corn ($CORN) is proving an exception after a massive surge and breakout in June. Chart 11 shows corn breaking a few resistance zones and hitting a 52-week high last week. The downtrend trend has clearly reversed and corn pulled back over the last few days. For an idea of where this pullback might end, I overlaid the Fibonacci Retracements Tool and marked broken resistance zones in yellow. The 38% retracement and first broken resistance zone are coming into play now. Further down, the 50% retracement and February-March highs mark second support around 400.

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Chart 11

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Chart 12

Chart 12 shows the Corn Trust ETF (CORN) with a deeper pullback. The ETF does not always track the underlying step for step. The decline is quite steep so I drew a Raff Regression Channel to define the downswing. Look for a break above 25.1 to signal an end to this correction and mark a resumption of the bigger uptrend.