CYCLICALS LOSE MARKET LEADERSHIP -- PLUNGING RETAILERS ARE A CAUTION SIGN FOR THE MARKET -- THE S&P 500 NEARS A TEST OF ITS SEPTEMBER HIGH -- SMALL CAPS LOSE MORE GROUND -- VIX CLIMBS BACK OVER 20
CONSUMER DISCRETIONARY SPDR LOSES LEADERSHIP... One of the more positive signs throughout 2015 has been leadership by consumer discretionary stocks. In fact, cyclicals have been the market's strongest sector all year. That can be seen by its rising relative strength ratio on top of the chart. But not today. Chart 1 shows the Consumer Discretionary SPDR (XLY) falling sharply today as it approaches a test of its September high and moving average lines. Even worse, it's been pulled down by a rout in retail stocks. That's not a good sign for the economy or the stock market.
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Chart 1
RETAILERS TUMBLE... Retail stocks are in free-fall. The daily bars in Chart 2 show the S&P Retail SPDR (XRT) gapping nearly 4% lower today and threatening to close at the lowest level in a year. It's also in danger of breaking a support line drawn under its 2014 lows. Volume has been heavy over the last two days as prices have fallen. Big names like Macy's and Nordstrom are grabbing most of the attention. But a lot of retailers are being sold heavily. How bad the group is doing relative to the rest of the market can be seen by the falling XRT/SPX ratio on top of the chart. It is in danger of falling below its 2014 low. That's not good for retailers or the stock market. Consumer spending is two-thirds of the economy. Since the direction of retail stocks often tells us something about the strength of consumer spending, this serious a breakdown is a big source of concern.
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Chart 2
S&P 500 NEARS TEST OF SEPTEMBER HIGH ... Chart 3 shows the S&P 500 trading below its 200-day average for the second day in a row. It's also bearing down on its September peak near 2020. That will be an important test. Its 50-day line is just below that. A close below those two lines would signal a much deeper correction. Such a breakdown would also call into question the sustainability of the fourth quarter rally. Some other indexes look even worse. Chart 4 shows the S&P 600 Small Cap Index in danger of slipping back below its 50-day moving average. Lack of upside participation by smaller stocks has been a source of concern over the last month. More weakness by smaller stocks would worsen the market's technical condition.
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Chart 3
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Chart 4
VIX CLIMBS ABOVE 20... Chart 5 shows the CBOE Volatility (VIX) Index trading back above the 20 level in afternoon trading. The last time that happened was in August when stocks sold off. The jump in the VIX (and the break of its down trendline) may also be hinting at more stock selling to come. We'll take a more in-depth look at market trends over the weekend.
