S&P 500 FALLS BELOW NOVEMBER LOW IN HIGHER TRADING -- NYSE ADVANCE-DECLINE LINE ALSO BREAKS SUPPORT -- SECTOR ROTATIONS TURN DEFENSIVE -- CRUDE NEARS TEST OF 2009 LOW -- TREASURY BOND/STOCK RATIO STRENGTHENS AS COMMODITY INDEX TUMBLES TO MULTI-YEAR LOWS
S&P 500 FALLS BELOW SEPTEMBER LOW... My Friday afternoon message showed small caps breaking their November lows, and wrote that the S&P 500 Index was in the process of testing that important level. Chart 1 shows the S&P 500 Large Cap Index ending the week below that support level around 2020. That level is even more important because that's where the mid-September peak took place. In a sense, that means that the SPX broke two support levels. And it did so in heavier trading. That can be seen by the wider candlevolume bar for Friday. "Candlevolume" bars are candlestick bars adjusted for volume. A red candlestick indicates a down day. A wider bar indicates heavier trading. That's a negative combination. That breakdown was confirmed by bad breadth figures. There were 314 new 52-week lows on the big board versus only 7 new highs. Declining stocks overwhelmed advancing stocks by a seven to one ratio. The line below Chart 2 also shows the NYSE Advance-Decline line falling to the lowest level in two months.
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Chart 1
SECTOR ROTATIONS TURN NEGATIVE... All ten market sectors fell this week while the S&P 500 lost -3.8%. Small caps lost an even larger -5%. The biggest sector losers were energy and materials which were weighed down by falling commodities. Other underachievers were economically-sensitive cyclicals, financials, and technology. Defensive stocks like utilities and staples held up a bit better. Those rotations reflect a more defensive stance. So does the big jump in long-dated Treasuries which were the week's biggest winners. That helped support utilities, but weakened banks and insurers which are hurt by lower yields. High yield (junk) bonds tumbled to multi-year lows which mainly reflects falling bond values in the energy and materials sectors. Emerging markets led a downturn in foreign shares. Chinese shares fell along with commodity producers like Mexico and Russia. The Chinese yuan ended at the lowest level in four years which added to global concerns. Canadian stocks, which depend on commodity prices, suffered their lowest close in two years. The drop in crude oil to the lowest level in six years was cited as a big reason for the week's stock losses. Chart 2 shows WTIC Light Crude ending the week at $35. Its next big test will be its 2009 closing low at $33.98. A lot may depend on that previous low holding.
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Chart 2
BOND/STOCK RATIO STARTING TO TURN UP ... Stocks have done much better than bonds during the six-year bull market starting in 2009. The Treasury bond/stock ratio in Chart 3, however, shows that long-dated Treasuries have held their own versus stocks since the start of 2014. A case can even be made that bonds are starting to do better. The green line is a "ratio" of the 20+ Year Treasury Bond iShares (TLT) divided by the S&P 500 SPDRs (SPY). After hitting bottom during June, the ratio spiked during August as the stock market sold off. It turned higher again this week with stocks falling and Treasuries rising. In between those two events, the ratio formed a "higher low" between June and November (rising trendline). That may be a hint that the pendulum is swinging in favor of bonds over stocks. Or that stocks are no longer the favored asset. That may reflect growing fears of global deflation reflected in falling commodity prices. Chart 3 shows that the bond/stock ratio started rising in mid-2014 when the CRB Index peaked. The latest drop in the CRB to a two-decade low may also account for recent upturn in favor of Treasury bonds.
