SIGNS OF COMMODITY BOTTOM ARE GOOD FOR GLOBAL STOCKS -- OVERSOLD ENERGY SECTOR REBOUNDS -- FREEPORT MCMORAN LEADS COPPER RALLY -- SILVER ALSO TURNS UP -- PERCENT OF NYSE STOCKS ABOVE 5O-DAY AVERAGE IMPROVES -- HIGH YIELD BOND ETF BOUNCES OFF CHART SUPPORT
ENERGY SECTOR MAY BE BOTTOMING... Global stocks continue to bounce off important support levels. One of the supporting factors is new strength in commodity-related energy and material stocks. I've written previous messages on new signs of strength in commodity markets -- especially copper and energy. My August 27 message carried the headline: "ENERGY STOCKS AND CRUDE ARE IN CHART SUPPORT AND DEEPLY OVERSOLD". My September 9 message was headlined: "OVERSOLD COPPER AND COPPER STOCKS ARE BOUNCING OFF MAJOR CHART SUPPORT AND MAY BE SCRAPPING BOTTOM". Since then, copper and energy stocks have shown new market leadership. Let's start with energy. The weekly bars in Chart 1 show an updated version of the August 27 chart and shows the Energy Sector SPDR (XLE) bouncing off its 62% Fibonacci retracement line from its 2009 low to its 2014 high, which also coincides with chart support at its 2012 low. The 14-week RSI line is not only oversold, but the two bottoms show a positive divergence. That message also showed WTIC crude oil (solid line) bouncing off major chart support at its 2009 low. Odds favored higher prices both in the commodity and its related stocks. My September 9 message came to the same conclusion on copper and copper stocks.
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Chart 1
FREEPORT MCMORAN IS BOTTOMING... My September 27 message showed the copper bellwether Freeport McMoran (FCX) bouncing off major chart support at its 2008 low (Chart 2). It's 14-week RSI line also shows positive divergence (two bottoms) from oversold territory under 30. At the time, the price of copper was bouncing off a long-term support line. The daily bars in Chart 3 show FCX moving above its September peak to reach the highest level in nearly three months. Its relative strength line (below chart) is rising as well (as is the price of copper). This is the strongest performance in the copper bellwether since May (when the S&P 500 peaked). Most of the SPX weakness at that time was coming from falling commodity shares. Those same stocks are now helping support the market. My September 27 suggested that "Since both commodity groups (copper and energy) are economically-sensitive, any bottom fishing there would be consistent with a stronger global economy. Firmer prices might also relieve pressure on commodity exporters like Australia and Canada, as well as several emerging markets. Firmer commodity prices may also be hinting that the worst of the crisis in China might be over. That should be supportive to global stocks." There's a lot riding on a potential commodity bottom.
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Chart 2
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Chart 3
SILVER TURNS UP ... Last Friday's weak jobs report, along with dampened expectations for a 2015 Fed rate hike, pushed the dollar lower and gave an added boost to commodity prices, including precious metals. Silver has emerged as the leader in that group. The daily bars in Chart 4 show Silver iShares (SLV) climbing to the highest level since June, and in the process of challenging its 200-day average. Silver is another oversold commodity rebounding from a six-year low. The fact that silver is doing better than gold may also carry a positive message. Silver is part precious metal part industrial. I suspect the industrial part is pulling it higher. Gold is also benefiting from the likelihood that a rate hike this year is off the table. But if the recent rise in other economically-sensitive commodities continues, silver may continue to outshine gold.
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Chart 4
NYSE PERCENT OF STOCKS ABOVE 50-DAY AVERAGE TURNS UP ... One of the warning signs starting in the spring that "market breadth" was weakening was the drop in the percent of NYSE stocks trading above their 50- and 200-day moving averages. One of those lines is starting to show improvement. The blue line in Chart 5 shows the percent of NYSE stocks above their 50-day average jumping from deeply oversold territory below 10% to a three-month high of 42%. It still needs to clear the 50% line to turn its trend back up again. The blue line, however, only measures shorter term market turns. The red line in Chart 6 shows the percent of NYSE stocks above their 200-day line. That's the one that measures major market trends. And it hasn't turned up yet. It's currently testing its mid-September peak near 26% and remains below its falling trendline. The red line would have to break that falling trendline to signal that market breadth is starting to improve. [Several major market indexes are currently testing resistance at their 50-day averages which they need to clear to turn their short-term trends higher. All of them remain below their 200-day lines].
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Chart 5
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Chart 6
HIGH YIELD BOND ETF BOUNCES OFF OCTOBER LOW... I've been focused on last October's price low as a very important support level in stocks. That's based on my belief that any market correction shouldn't break that prior trough. All U.S. stock indexes remain above that support level. As of today, so are junk bonds. I recently showed the iBoxx High Yield Corporate Bond iShares (HYG) falling toward a test of last October's low. Chart 7 shows the HYG bouncing off that support level. It still remains, however, below its 50-day moving average, and needs to do a lot more to reverse its current downtrend. But the ability to rebound from chart support is encouraging. I've pointed out several times that high-yield bonds are highly correlated to stocks. That being the case, what the HYG does from here may offer a clue about future stock direction. Most of the problems in the high yield space have come from depressed energy and mining stocks. If the recent commodity bounce continues, high yield bonds may get some relief from those sectors. Notice the close correlation between the HYG and the Energy SPDR (dashed line). Both are bouncing together.
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Chart 7
HOMEBUILDERS ARE HOLDING UP OKAY... Homebuilders continue to hold up better than most other market groups. The daily bars in Chart 8 show the Dow Jones U.S. Home Construction iShares (ITB) trying to climb back above its 200-day moving average. Not too many other groups can say that. Its relative strength line (above chart ) is still in an uptrend as well. It's likely that lower bond yields over the last week (and the likelihood of low rates remaining in place) are also helping homebuilders. Low bond yields mean low mortgage rates.
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Chart 8
MARKET INDEXES TEST 50-DAY LINE... The recent rally attempt has reached its second test. The first test was the ability of stock indexes to bounce off support near their summer lows. The second test is taking place today as they test overhead resistance at their September intra-day peak and/or their 50-day moving average. Chart 9 shows the Dow Industrials struggling to clear its mid-September peak. Chart 10 shows the S&P 500 meeting some selling at its (blue) 50-day average. It's not unusual for prices to back off an initial test of overhead resistance. Sooner or later, those overhead barriers will have to be exceeded, however, if any fourth quarter rally is going to materialize.
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Chart 9
