CONSUMER DISCRETIONARY AND TECHNOLOLGY STOCKS LEAD MARKET LOWER -- NASDAQ UNDERPERFORMANCE IS A BAD SIGN -- GOLD STOCKS HAVE A STRONG WEEK -- MONEY ALSO FLOWS TO UTILITIES, TELECOM, AND FOOD -- TYSON FOODS HITS RECORD HIGH -- NETFLIX TUMBLES BELOW SUPPORT
CONSUMER DISCRETIONARY SPDR LEADS MARKET LOWER... It's never a good sign to see economically-sensitive stocks leading the market lower. That's because they're most closely tied to investor confidence (or lack therof) in the U.S. economy. But that's what happened this week. Chart 1 shows the Consumer Discretionary SPDR (XLY) suffering its lowest close in a near. More telling is this week's drop in the XLY/SPX ratio (red line) to the lowest level in six months. That's a bad combination of absolute and relative weakness. Among the weakest parts of the XLY were autos, retailers, travel-related, and internet stocks. Chart 2 shows Amazon.com (AMZN) closing below its 200-day average for the first time in a year. Its relative strength ratio (red line) has also turned down. The stock lost -14% this week, and was the second worst percentage loser in the Nasdaq 100. Amazon.com also happens to be the biggest holding in the XLY. Tesla Motors (TSLA) was the Nasdaq 100's weakest stock with a loss of -15%. Chart 3 shows Tesla falling to a two-year low and completing a "double top" reversal pattern (see circles). That doesn't bode well for the auto industry. The downturn in this group doesn't bode well for the stock market either. Neither does heavy selling in the Nasdaq market, especially among internet stocks.
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Chart 1
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Chart 2
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Chart 3
NASDAQ MAY BE ON VERGE OF BREAKDOWN... It's also never a good sign to see the Nasdaq leading the rest of the market lower, which it did this week. A -3% plunge on Friday (and a -5% loss for the week) made it the weakest of the major market indexes. Heavy selling in software and internet stocks were especially troubling. So is its chart pattern. The weekly bars in Chart 4 show the Nasdaq Composite bearing down on its January and August lows. On a closing basis, the Nasdaq is already at the lowest level in more than a year. In addition, the Nasdaq/S&P 500 ratio (red line) on top of Chart 4 has fallen to the lowest level in a year. That's a bad omen for the rest of the market. Weekly MACD lines (below chart) have fallen to the lowest level since 2009. That greatly increases the odds that the Nasdaq will undercut its 2015 lows. That would complete a "double top" reversal pattern which would signal another downleg. If that happens, other major stock indexes will most likely do that same. That would also confirm that the stock market has entered a bear market.
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Chart 4
GOLD MINERS ARE WEEK'S STRONGEST GROUP... It's also not a good sign to see money flowing into gold and gold mining stocks. But it is. Chart 5 shows the Market Vectors Gold Miners ETF (GDX) ending the week at a new seven-month high. Its 20% gain made it the week's strongest group. A sharp drop in the dollar was part of the reason. But so were the continuing drop in U.S. bond yields to the lowest level in ten months (as Treasury prices continued to rise), and continuing weakness in the stock market. In times of financial stress, money usually flows into gold assets. Two of the mining leaders which I showed on Wednesday are Barrick Gold (ABX) and Newmont Mining (NEM). The GDX/SPX relative strength ratio (below chart) rose to the highest level in eight months. In addition to gold miners, dividend-paying utilities hit a new high as did telecom leaders AT&T and Verizon (which I featured in several recent messages). Food stocks continue to lead consumer staples higher. The big winner is that group this week was Tyson Foods.
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Chart 5
TYSON FOODS SURGES TO RECORD HIGH... I've written several positive stories about rising food stocks over the past few months. I first wrote about Tyson Foods (TSN) during Thanksgiving week when food stocks really started rising. I wrote at the time that one of the driving forces behind the price gains in TSN were falling feed prices -- and corn in particular. Tyson is the country's biggest meat processor (cattle, hog, and poultry) and it projected a record profit for the coming year. As a result, the stock jumped 10% on Friday to a record high. Lower feed costs were cited as a positive influence. Chart 6 shows the stock taking off during 2012 just as the price of corn was peaking. Lower corn prices since then have helped support the stock. Food stocks are also part of the consumer staples group which is defensive in nature. People have to eat in good times and bad. That's also why food stocks aren't a bad place to be in weak stock market.
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Chart 6
INTERNET STOCKS TUMBLE... A lot of the selling in the Nasdaq this month was tied to a big drop in internet stocks. Since the start of the year, the Nasdaq Composite has lost -12% (versus an -8% loss in the S&P 500). The First Trust Dow Jones Internet Index (FDN), however, has fallen -19% (but is down more than 20% since December which is bear market territory). Chart 7 shows the FDN falling to the lowest level in a year, and breaking a support line extending back to 2012. The red line on top of Chart 7 compares the FDN to the Nasdaq market (FDN:$COMPQ). The red line peaked at the end of 2015 (right at its early 2014 peak), and has been falling since the start of year. In a peaking stock market, investors usually punish stocks with high valuations -- like internet stocks. That's another bad sign for the Nasdaq and the stock market in general.
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Chart 7
NETFLIX IN BEAR MARKET ... All of the so-called FANG stocks fell sharply this week. That includes Facebook (-7%), Amazon (-14%), Netflix (-9%) and Google (-7%). They're all heavily represented in the First Trust Dow Jones Internet Index (FDN) shown in Chart 7. I've already shown the breakdown in Amazon.com in Chart 2. Chart 8 shows Netflix (NFLX) ending the week at the lowest level in nine months. It is trading well below its 200-day line. By undercutting its August intra-day low, the stock has also completed a "double top" reversal pattern. The Netflix/Nasdaq ratio (top of chart) has turned down as well. From its early December high, Netflix has lost -36%. Add Netflix to the growing list of stocks already in a bear market.
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Chart 8
VIX STILL HAS FURTHER TO GO ... My message of January 20 included the headline "Weak Rebound in the VIX Suggests Stocks Have Further to Fall". That message showed that every important stock market bottom since 2001 has been marked by a rise in the CBOE Volatility (VIX) Index above 40. [It rose above 80 during 2008]. Chart 9 shows VIX moves above 40 during 2010, 2011, and this past August leading to market upturns. Its current reading of 23% is in correction territory, but not nearly high enough to signal a market bottom. Chart 10 compares the current low VIX reading to its August spike over 40. If history is any guide (and it usually is), the VIX needs to reach 40 to signal a potential market bottom. Until that happens, stocks probably have further to fall.
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Chart 9
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Chart 10
JUMP IN YEN HURTS JAPANESE STOCKS ... Last Saturday's message showed a plunge in the Japanese yen following the BOJ move to negative interest rates. That helped boost global stocks, and Japanese stocks in particular. A sharp rebound in the yen this week, however, short-circuited the Japanese rally. Chart 11 shows the yen jumping this week back to its January high (which was partially tied to a sharp drop in the U.S. dollar). Since the yen is also used as a safe haven currency, its weekly jump may have also been a reflection of weaker global stocks. The Nikkei 225 lost -4% as the yen jumped. Japan iShares (EWJ) fell a similar amount. The biggest weekly loser was the Wisdom Tree Japan Hedged Equity ETF (DXJ). Chart 12 shows that ETF giving back most of its gain from the previous week. The DXJ lost -8% on the week. A currency hedged ETF only works when stocks are rising and the currency falling. That's the opposite of what happened this past week.
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Chart 11
