FINANCIALS HAVE A STRONG WEEK -- SO DO ECONOMICALLY-SENSITIVE MATERIALS AND INDUSTRIALS -- SMALL AND MIDCAP INDEXES TURN UP -- EQUAL-WEIGHTED S&P 500 ETF BREAKS OUT -- NYSE ADVANCE-DELINE LINE HITS NEW RECORD -- FTSE ALL-WORLD EQUITY INDEX TURNS UP
FINANCIALS HAVE A STRONG WEEK... Financials went from the year's weakest sector to the strongest gainer for this past week (+3.8%). Chart 1 shows the Financials Sector SPDR (XLF) climbing to the highest level in three months and challenging its 200-day moving average (red arrow). The dotted line, which is the XLF/SPX relative strength ratio, jumped this week for the first time since February. Banks played a big role in the week's rally, as did asset managers and life insurers. The market usually does better when financial stocks are helping.
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Chart 1
MATERIALS AND INDUSTRIALS ALSO LEAD... It's also encouraging that economically-sensitive materials and industrials are leading the market higher. Chart 2 shows the Materials Sector SPDR (XLB) closing above its fourth quarter high. Its relative strength line (top of chart) turned up in February. The XLB is being led by stocks tied to industrial commodities like aluminum, copper, and steel. That's a good sign for the global ecnomomy. Chart 3 shows the Industrials Sector SPDR (XLI) also closing above its fourth quarter high with a rising relative strength ratio. A 3% gain in transportation stocks contributed to the XLI performance. Consumer discretionary and energy stocks also showed relative strength, while defensive consumer staples and utilities underperformed. Staples were the only group to lose ground during the week. That shows a more optimistic market mood. Also encouraging are stronger gains in smaller stocks.
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Chart 2
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Chart 3
SMALLER STOCKS TURN UP ... Chart 4 shows the S&P 400 Mid Cap Index ($MID) trading at the highest level in four months after having cleared its 200-day average and a resistance line drawn over its June/November highs. The MID/SPX ratio (top of chart) has been rising since January. Chart 5 shows a similar upturn in the S&P 600 Small Cap Index (SML). The Russell 2000 Small Cap Index (not shown) is still testing those resistance barriers, but an upside breakout is likey. That's because the SML usually leads the RUT on the upside.
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Chart 4
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Chart 5
EQUAL WEIGHT S&P 500 LEADS... Another way to measure relative performance between large and smaller stock is to compare the relative performance of the S&P 500 large cap index to an equal-weighted version of the same 500 stocks. The S&P 500 is "capitalization-weighted" which means that it gives greater weight to larger stocks. As its name implies, the "equal weighted" version gives equal weight to each of the 500 stocks. As a result, larger stocks have less influence, and smaller stocks have more. Chart 6 shows the S&P 500 Large Cap Index ($SPX) trading at a four-month high and up against a resistance line drawn over its July/November highs. Notice that the falling upper line is parallel to a similar trendline drawn below its August/February lows. That pattern looks more like a "continuation" than a "reversal" pattern. Notice also that the 50-day EMA line has risen above the 200-day EMA line (blue circle). That's another bullish sign.
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Chart 6
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Chart 7
EQUAL WEIGHTED VERSION IS DOING BETTER... Chart 7 plots the Guggenheim S&P 500 Equal Weight ETF (RSP) over the same time span. [Same 500 stocks, but equal weighted]. That chart shows the RSP having already cleared the falling trendine from last spring and its fourth quarter high. In addition, the rising RSP/SPX ratio (top of chart) shows RSP outperformance since January. That's another way of showing that the smaller stocks in the S&P 500 have been rising than the largest stocks. Notice also that the 50-day EMA line has exceeded the 200-day EMA for the first time since last August. That's another confirmation that the market correction has that started last summer has reversed to the upside. That's also another way of showing broad participation in the market rally which explains the improvement in various measures of market breadth.
NYSE ADVANCE-DECLINE LINE HITS RECORD HIGH... Chart 8 shows the NYSE Advance-Decline line exceeding its spring 2015 peak to reach a new record high. The NYAD is a running cumulative total of the number of big board advancing stocks minus its decliners. It's the most common and simple measure of "market breadth". It's interpretation is also very simple. A falling NYAD line is usually bad for stocks, while a rising line is bullish. It's a leading indicator for the market. The downturn in the NYAD last spring was an early sign of a market correction. So was the second downturn in December. After bottoming in February, the NYAD line exceeded its fourth quarter high in March and its spring 2015 high this month. That's another bullish sign for U.S. stocks.
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Chart 8
GLOBAL STOCK INDEX TURNS UP ... I've referred previously to the need for better "global breadth". The more stock markets in uptrends, the stronger the global rally. And that's finally happening. Chart 9 shows the FTSE All World Equity Index ($FAW) having exceeded its 200-day average (red line) and a bearish trendline drawn over its May/November highs. That signals the end of the global correction that started last May. The FAW includes stocks in 47 developed and emerging markets, including the U.S. Some of the biggest gains in foreign developed markets have been in commodity related countries like Australia, Canada, and Britain whose stock indexes recently cleared their 200-day lines. (Britain's FTSE is heavily influenced by energy and mining stocks). Emerging markets tied to commodities have led developed markets. Since the February 11 bottom, foreign shares have actually gained more than the U.S. The Vanguard FTSE All World ex-US ETF (VEU) has risen 14% while the $S&P 500 has gained 12%. Emerging markets are up 18% over the same time span. It's good to have foreign markets helping with the heavy lifting.
