DOW ENDS THE WEEK BELOW 200-DAY AVERAGE -- INDUSTRIAL SPDR DROPS TO NINE-MONTH LOW -- S&P 500 ENDS BELOW 50-DAY LINE -- SMALL AND MIDCAP STOCKS THREATEN 200-DAY LINES -- NYSE ADVANCE-DECLINE LINE HITS NEW LOW -- CRB INDEX FALLS TO SIX-YEAR LOW
DOW ENDS BELOW 200-DAY LINE -- XLI FALLS TO NEW 2015 LOW... The stock market had a bad chart week. Chart 1 shows the Dow Industrial Average closing well below its 200-day moving average and within striking distance of its July low. [Friday's drop marked the first "weekly" close below the 200-day line this year]. A test of its July low appears imminent. I wouldn't be surprised to see it broken. That's because of Chart 2 which shows the Industrials Sector SPDR (XLI) tumbling to the lowest level since last October. [Three of its biggest losers were United Technologies (-10%), Caterpillar (-8%), and 3M (-5%)]. I've mentioned before that the correlation between those two industrial indexes has been 90% over the last ten years. When one drops, the other usually follows. The XLI also includes transportation stocks which have been diverging badly as well. Chart 3 shows the Dow Tranportation Average falling sharply since March. Historically, that kind of negative divergence between the TRAN and the INDU has ended badly. The current 10% divergence between the two Dow Averages is the worst in three years.
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Chart 1
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Chart 2
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Chart 3
SMALLER STOCKS ARE PULLING LARGE CAPS LOWER... Chart 4 shows the S&P 500 ending the week well below its 50-day moving average. It appears headed for a retest of its July low and 200-day average. Smaller stocks are doing even worse, which isn't a good sign. Chart 5 shows the S&P 600 Small Cap Index ($SML) already below its July low and nearing a test of its May low and 200-day line. Small caps have been falling faster than large caps since late June as shown by the falling SML/SPX ratio (above chart). Midcaps look even worse. Chart 6 shows the S&P 400 Mid Cap Index ($MID) right on its 200-day line after falling to the lowest level in four months. Its relative strength ratio (above chart) has already fallen to the lowest level in six months. That's important because smaller stocks usually fall faster than large caps at market peaks. Large caps are usually the last to roll over. That's why market breadth indicators, which have been weakening of late, are so important. "Capitalization-weighted" stock indexes like the S&P 500 tell us mainly what large caps are doing. Breadth indicators, small and midcap stock indexes, and equal weighted ETFs tell us what most other stocks are doing. And they've been all warning of a market setback.
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Chart 4
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Chart 5
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Chart 6
NYSE ADVANCE-DECLINE LINE BREAKS 200-DAY AVERAGE... My Wednesday message showed the NYSE Advance-Decline line dropping since April, and diverging from large cap stock indexes like the S&P 500. Chart 7 shows the NYAD line undercutting its July low to end at the lowest level in six months. It has also fallen below its 200-day moving average for the first time since 2011. Another sign of deterioration in the broader market is the fact that 399 big board stocks fell to 52-week lows on Friday versus only 31 new highs (a downside ratio of 12 to 1). That increases the odds for bigger losses in popular stock indexes. I mentioned on Thursday that stocks are also entering the more dangerous months of August and September when losses are more likely.
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Chart 7
CRB INDEX FALLS TO SIX-YEAR LOW ... A big story having a negative impact on stocks is the continuing plunge in commodity prices. The monthly bars in Chart 8 show the Reuters/Jefferies CRB Index (of nineteen commodities) falling to the lowest level since 2009 at the bottom of the financial crisis. Gold and silver prices have fallen to six-year lows, as have industrial commodities like aluminum and copper. Oil prices have fallen below $50 for the first time since March. There are several reasons why the plunge in commodity prices is worrisome. For one thing, it suggests that deflationary problems may be resurfacing which would frustrate central bank attempts to boost inflation. For another, it could be signalling a slowdown in China and the global economy. Falling commodities are bad for emerging markets, and especially commodity producers like Latin America and Russia. It's also bad for Australia and Canada whose currencies and stocks are under pressure. And, finally, falling commodities are bad for stocks tied to commodities like basic materials and energy. Not surprisingly, those two groups were the past week's biggest losers.
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Chart 8
ENERGY AND MATERIAL STOCKS PLUNGE... As to be expected, commodity related stocks are being hurt the most by falling raw material prices. The two weakest sectors this past week were materials (-5%) and energy (-4%). Chart 9 shows the Materials Sector SPDR (XLB) ending the week at the lowest level since last October. Its relative strength line (below chart) looks even worse. The biggest group losers were copper stocks (-22%), gold (-12%), mining (-8%), and aluminum (-6%). Freeport McMoran (FCX), the biggest copper producer, fell to the lowest level in six years, while the gold producer, Newmont Mining (NEM), fell to the lowest level in thirteen years. Those are huge losses and can't help but weigh on the rest of the stock market. There are 30 material stocks in the S&P 500. There are even more energy stocks (43). Chart 10 shows the Energy SPDR (XLE) falling to the lowest level in thirty months. Its relative strength ratio (below chart) is even weaker. That's not good news for oil because energy stocks often lead the commodity. And of course it's not good for the stock market. Energy and materials account for 15% of the S&P 500. It's hard for that index to withstand such concentrated weakness in so many stocks at the same time.
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Chart 9
