NYSE COMPOSITE REMAINS IN CONSOLIDATION -- % OF NYSE STOCKS ABOVE MOVING AVERAGES NEEDS TO SHOW IMPROVEMENT -- S&P INDEXES BOUNCE OFF 200-DAY AVERAGES -- SMALL CAPS NEED TO DO BETTER -- TRANSPORTS FINALLY SHOW SOME BOUNCE -- DOLLAR REBOUND CONTINUES
NYSE COMPOSITE FINDS SUPPORT AT MARCH LOW... I wrote a message three Thursdays ago (July 9) on Elliott Waves which suggested that the May high on the NYSE Composite Index had completed a major upwave from its 2011 bottom (Wave 3), and was entering a Wave 4 period of correction or consolidation. I further suggested that a consolidation was more likely than a correction, and that it could last into the autumn. After that, the market was likely to resume its major uptrend (Wave 5). Chart 1 is an updated version of the NYSE chart shown in the earlier message. The two converging red trendlines formed a "bearish wedge" pattern which is usually a prelude to a market setback which started in May and has continued into July. I suggested that the first line of support was its March low. The daily bars show that the NYSE has bounced off that support line twice over the last month. While that's encouraging, the NYSE needs to do more to turn its trend back up again. It has to clear its 50- and 200-day moving averages. More importantly, it needs to clear its July intra-day high at 11032. Some of its breadth indicators also need to show improvement.
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Chart 1
% NYSE STOCKS ABOVE MOVING AVERAGE LINES ... The blue line in Chart 2 shows the percent of NYSE stocks above their 50-day moving average peaking over 70% during April and falling below 30% during July. Obviously, it's better when that line is rising. The good news is that the blue line has bounced off 25% twice this month. [Readings below 30% usually signal an oversold market]. To signal that it's starting to recover, however, the blue line needs to clear its mid-July peak near 44%. That would signal that the market's intermediate trend is strengthening. The red line in Chart 3 shows the percent of NYSE stocks above their 200-day average. The line peaked near 65% during April, and has fallen below 40% since then. That means that 60% of NYSE stocks are in downtrends. For comparison purposes, that line fell to 30% last October when the NYSE Index lost -10% of its value on an intra-day basis. So far, the NYSE has lost -5% which is more like a consolidation than a correction. To improve its negative breadth condition, the red line would need to clear its July peak near 48%. A move back above 50% would also be a positive sign.
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Chart 2
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Chart 3
200-DAY AVERAGES PROVIDE SUPPORT... The 200-day moving average continues to provide support below the market. Chart 4 shows the S&P 500 Large Cap Index bouncing off that red support line for the second time this month. It's also trying to climb back above its blue 50-day line. That keeps the SPX locked in a sideways trading range. Whether or not it's strong enough to attack its old high will likely depend on on whether its breadth improves. The red line on top of Chart 4 shows the percent of SPX stocks above their exponentially smoothed (EMA) 200-day line. That line fell from 80% to 50% between February and July, which is consistent with a sideways market. To strengthen its trend, the red line needs to clear its July peak at 65%. That would still leave it well below its highs for the year, but would be an improvement.
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Chart 4
SMALL CAP INDEX BOUNCES OFF 200-DAY AVERAGE... Small and midcap indexes are also bouncing off their 200-day lines. Chart 5 shows the S&P 600 Small Cap Index ($SML) finding support at its red 200-day moving average and chart support along its May low. It still has a long way to go, however, to turn its short-term trend back up again. First, it has to clear its blue 50-day line; then it has to clear its July intra-day peak at 729. In a way, small cap direction is more important than large cap direction. That's because smaller stocks usually as act as leading indicators for large stocks. The black line below Chart 6 shows the SML/SPX ratio falling over the last month as the market weakened. The ratio is now starting to bounce from its May low. A rising small cap/ large cap ratio line would a positive sign. The red line on top of Chart 5, however, shows the percent of small cap stocks above their 200-day EMA line. After peaking near 75% during March, it slipped below 50% this past month. It too needs to start climbing if small caps indexes are going to mount a serious rally attempt. A good start would be the red line exceeding its July high.
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Chart 5
TRANSPORTS SHOW IMPROVEMENT... One of the factors holding the stock market back has been downtrends in groups like the transports. It's hard to imagine the rest of market resuming its uptrend until the transports start showing some strength. And that may finally be happening. Chart 6 shows the Dow Transportation Average rising to a new monthly high yesterday. It also climbed above its blue 50-day line for the first time since March. Its 14-day RSI line (above chart) has climbed above 50 for the first time in three months; and daily MACD lines are climbing. It still has a way to go to turn its major trend higher, which would include a rise above its red 200-day line. But the fact that the transports are showing some improvement may offer support to the rest of the market.
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Chart 6
DOLLAR ADVANCES... The U.S. Dollar continues to advance. Chart 7 shows the PowerShares Dollar Bullish Fund (UUP) continuing its rebound off its 50-day moving average. That makes sense given the general impression that the Fed is getting closer to a rate hike. The UUP needs to clear its July peak to resume its uptrend. I think it's just a matter of time before that happens. A rising dollar, however, would serve to keep downward pressure on commodity markets. It might also have a negative impact on U.S. large cap stocks whose overseas business is hurt. A rising dollar increases downside pressure on foreign stock ETFs (which are traded in dollars). It also increases the need to hedge against foreign currency weakness when investing in foreign stocks.
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Chart 7
HIGH YIELD BONDS BOUNCE ... High yields bonds have been falling since the start of June. Chart 8 shows High Yield Corporate Bond iShares (HYG) rebounding from a six-month low. The prospect of higher interest rates may be reducing the appeal of higher-yielding (and riskier) junk bonds. A weak energy sector has also hurt the group (because it increases risk of default). So has a weaker stock market. Junk bonds are hybrids between bonds and stocks. They often trend more closely with stocks than bonds. As such, they often act as confirming indicators for the stock market. Chart 8 shows the HYG starting to rebound (along with stocks). But they have a way to go to reverse their downtrend. The willingness of investors to assume more bond risk, however, often coincides with their willingness to do the same with stocks.
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Chart 8
EMERGING MARKET CURRENCIES PULL STOCKS LOWER... Emerging market assets are suffering from the dual threat of rising U.S. interest rates and a stronger dollar. The most direct result is seen in EM currencies. The green line in Chart 9 shows the Wisdom Tree Emerging Currency Fund (CEW) falling to the lowest level in five years. [The CEW includes a basket of emerging currencies]. That's a side effect of a rising dollar and weakening commodity prices (especially in Brazil and Russia). That's important because weaker EM currencies usually coincide with weaker EM stocks. The red line in Chart 9 shows a correlation between Emerging Markets iShares (EEM) and the CEW (green line). The EEM itself is in danger of falling to the lowest level in two years. That may increase risk for global stocks in general. China also has a lot to do with EEM weakness.
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Chart 9
EMERGING MARKET ISHARES THREATEN SUPPORT... The weekly bars in Chart 10 show Emerging Markets iShares (EEM) in the bottom half of a trading range that started in 2011. The EEM is in danger of falling below last year's late intra-day low at 36.43 and a rising trendline extending back to 2011. That would be the first serious violation of chart support in four years. Plunging commodity prices are a big problem for EM countries that depend on commodity exports (which is made worse by a rising dollar). Rising Treasury yields also reduce the appeal of higher yielding (and riskier) EM assets. Emerging markets have underperformed developed markets for four years. That hasn't presented a major problem as long as the EEM has remained in a sideways trading range. Developed markets might not react as well to a breakdown in emerging market stocks.
