FRIDAY JUMP KEEPS STOCKS IN UPTREND -- PRICE PATTERN LOOKS POSITIVE -- GOLD STOCKS JUMP ON WEAK DOLLAR -- PROSPECTS FOR HIGHER RATES BOOST BANKS -- FALLING OIL HELPS AIRLINES RISE -- NASDAQ 100 NEARS NEW RECORD -- APPLE MAY BE TURNING UP
SHORT-TERM PATTERN LOOKS POSITIVE... A strong rally on Friday more than erased losses from Thursday and left the market in much better shape. Chart 1 shows the S&P 500 ending the week back above its 200-day average after bouncing off its 50-day line on Thursday. Chartwatchers will now recognize the pattern of the last month as a "pennant" or "symmetrical triangle" which is defined by two converging trendlines. That's usually a continuation pattern and increases the odds for an upside breakout. That would fit with the seasonal tendency for stocks to end the year on a high note. The 14-day RSI line (above chart) ended above its 50 line. Daily MACD lines (below chart) look poised to turn positive. The main reason being given for Friday's surge was the strong jobs report and increased expectation for higher rates. That, combined with a big jump in bond yields on Thursday, may explain why financials ended the week on such a strong note. The plunge in the dollar on Thursday may also account for the big jump in gold and gold stocks. A drop in crude oil below $40 pushed energy shares lower. Airlines, however, got a boost from falling fuel costs. Technology was the week's strongest sector, led higher by semiconductors. Apple helped lead a Friday rally in that sector.
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Chart 1
DOLLAR PLUNGE BOOSTS GOLD STOCKS... Thursday's ECB announcement disappointed markets which pushed the Euro sharply higher and the dollar lower. That normally gives a boost to gold, and it did. The green bars in Chart 1 show the U.S. Dollar Index falling sharply (although it regained some ground on Friday). The orange bars show the Market Vectors Gold Miners ETF (GDX) jumping sharply (along with the price of gold). The chart also shows the USD backing off from chart resistance at its March high, while the GDX bounced off chart support at its September low. What the dollar does from here will help determine the strength of the gold rally. I suspect the dollar will start to recover once the Fed starts to raise rates. That would keep any gold rally from carrying too far. Higher rates are also negative for gold. A big test for the GDX will be whether or not it can clear its October high. That would be a sign of strength.
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Chart 2
RISING BOND YIELDS BOOST FINANCIALS... The ECB also disappointed bond investors on Thursday by pushing eurozone yields sharply higher. Treasury yields also surged. Chart 3 shows the 10-Year Treasury Note Yield jumping sharply on Thursday (although it pulled back on Friday). The strong November job report released on Friday increased odds for a rate hike later this month, which should also boost bond yields. That may explain why financials were Friday's strongest sector, led by banks, brokers and insurance stocks. Those groups usually benefit from higher bond yields.
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Chart 3
BANK CHART LOOKS POSITIVE ... Chart 4 show end KBW Bank Index SPDR (KBE) ending the week on a strong note. Like the S&P 500 chart, the two converging trendlines mark the last month's sideways action as a "continuation" pattern, which means odds favor the uptrend resuming once the upper line is broken. The KBE/SPX ratio (above chart) also shows bank relative strength starting a month ago. That's also when bond yields started climb (top chart). Thursday's jump in yields (and Friday's strong jobs report) gave banks and other financials another boost. Brokers and insurance stocks also ended the week on a strong note, and for the same reasons.
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Chart 4
FALLING OIL BOOSTS AIRLINES... WTIC crude fell below $40 on Friday and is dangerously close to a six-year low. That made energy stocks the week's biggest losers (-4.5%), and airlines one of the biggest winners (+6%). The daily bars in Chart 5 show the Dow Jones US Airlines Index ending the week just shy of its November high after bouncing off its 200-day average last week. The Airlines/SPX ratio (top of chart) started rising in July and has been trading sideways since October. It appears ready to resume its uptrend. The dotted lines in the top box show that crude started falling in July just as airlines started to take off. This week's drop in crude gave airlines an added boost. Chart 6 compares the performance of individual airlines. The leaders are JetBlue (JBLU), Alaska Airlines (ALK), and Southwest (LUV). The last two hit record highs this week, while JBLU is consolidating in a strong uptrend. Delta (DAL) has just turned positive for the year. United (UAL) and American (AAL) cleared their 200-day lines this week.
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Chart 5
Chart 6
NASDAQ 100 NEARS RECORD HIGH ... Technology stocks were the week's strongest sector, led by strong gains in semiconductors. That trend continued on Friday with the Nasdaq 100 leading the market with a gain of 2.3%. Amgen (AMGN) gained 4.3% on Friday to lead a biotech rally. Intel (INTC) gained 2.6% in the chip group, while Microsoft (MSFT) rose 3.1% to a new record. Chart 7 shows the PowerShares QQQ Trust ending the week just shy of a new record. Its relative strength line (above chart) is already there. [The QQQ includes the largest 100 non-financial stocks in the Nasdaq market]. Apple (AAPL), which is its biggest stock, also had a good Friday.
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Chart 7
APPLE LOOKING STRONGER... It's always a good idea to keep an eye on the stock of Apple. It's not only the biggest stock in the technology sector, but also the biggest stock in the U.S. market. And it hasn't been pulling its weight lately. But that may be about to change for the better. The daily bars in Chart 8 show Apple (AAPL) trading sideways over the last month between its (red) 200-day average and its (blue) 50-day line. The "coiling" pattern looks positive. The Apple/SPX ratio (top of chart) shows that it's been doing slightly better than the S&P 500 over the last two months. It was also the top percentage gainer in the Dow on Friday. That's a good start. So is the fact that Friday's gain came on rising volume. But the stock needs to clear its 200-day line to prove that it's turning higher. That would certainly good for Apple investors, the technology sector, and the market as a whole (not to mention stocks that are Apple suppliers). That's why Apple's direction carries a lot of weight.
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Chart 8
PROCTER & GAMBLE CLEARS 200-DAY LINE... Consumer staples were also strong weekly performers. The Consumer Staples SPDR (XLP) jumped more than 2% on Friday to the highest level in more than a month. A lot of the recent buying in the XLP has come from food producers and retailers. It's biggest weekly gainer was Kroger (KR) which I showed breaking out on Thursday. Other weekly leaders were Hormel (HRL) and Tyson Foods (TSN) which I recently showed hitting record highs. The fourth biggest gainer for the week was Procter & Gamble (PG). The daily bars in Chart 9 show PG ending the week above its 200-day average for the first time in nine months. The stock has also broken through a falling trendline drawn over its December/July peaks. Its relative strength ratio (gray line) has also been rising since July. It was also one of the Dow's biggest percentage gainers on Friday. The fact that PG sports a dividend yield of 3.4% adds to its appeal.
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Chart 9
AT&T TURNS UP ... Speaking of big dividend payers, AT&T (T) also had a strong day on Friday. [It has a dividend yield of 5.5%]. Chart 10 shows the stock closing at a two-month after recently bouncing off moving average lines. [Friday's bounce also came on higher volume]. Its relative strength line (above chart) has also started climbing. I'm not sure why money is starting to flow into high dividend-paying stocks. It may have something to do with the prospect for higher bond yields.
