DOW AND S&P 500 REMAIN IN SIDEWAYS PATTERN AFTER PASSING ONE-YEAR ANNIVERSARY OF MAY 2015 TOP -- BOTH ARE IN SHORT-TERM PULLBACKS BUT REMAIN ABOVE THEIR 200-DAY LINES -- NASDAQ UNDERPERFORMANCE MAY BE ABOUT TO TAKE A TURN FOR THE BETTER
VIX FAILS BREAKOUT ATTEMPT... My Thursday morning message showed the Volatility Index (VIX) trying to break through resistance near 17. It rose as high as 17.65 intra-day which was the highest level in two months. Fortunately, it wasn't able to close there. The good news is that the VIX closed at its low for the the day and dropped again on Friday. That left it well below the 17.00 resistance level. An upside breakout in the VIX would have signalled lower stock prices. The fact that the breakout attempt failed helped stabilize the market at week's end. My bad for jumping the gun.
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Chart 1
DOW AND S&P 500 REMAIN ABOVE 200-DAY LINES... The short-term trend for the Dow Industrials and the S&P 500 remains down. Chart 2 shows the Dow trading below its (blue) 50-day average. It remains, however, above its (red) 200-day line. That makes the market selling over the last month look more like a normal pullback after the sharp February/April rally. The trend over the last year, however, has been sideways. This past week the Dow marked the one-year anniversary of its record high last May at 18351. It closed Friday 851 points (-4.6%) below that year ago high. A lot of debate has taken place since then as to whether the past year's sideways movement is a major consolidation in a longer-range uptrend or a major top. I lean toward the consolidation view. Technical traders are also conditioned to "sell in May" which no doubt has caused some profit-taking. But not enough to do much damage to the market's overall trend. Chart 3 shows the S&P 500 in a similar situation (down -3.8% from last May). The current pullback there also looks pretty normal. The fact that their 50-day averages remain higher than their 200-day lines is another positive sign. The key to short-term market direction, however, may lie with the Nasdaq.
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Chart 2
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Chart 3
NASDAQ UNDERPERFORMS IN 2016... Chart 4 shows a weaker picture for the Nasdaq Composite Index ($COMPQ). That index didn't peak until last July and is down more than -8% since then. It has underperformed both the Dow and S&P 500 in 2016. The COMPQ/SPX relative strength ratio (below chart) shows how badly it's lagged behind the S&P 500 this year. The Nasdaq is down -4.7% YTD versus a 0.4% gain for the Dow and S&P 500.Unlike the Dow and S&P 500, the Nasdaq's April high fell well short of its fourth quarter high. In addition, it is currently trading below both its 50- and 200-day moving averages. I've suggested recently that Nasdaq weakness is holding the rest of the market back. That situation, however, may be about to take a turn for the better.
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Chart 4
NASDAQ MAY BE TURNING HIGHER... Chart 5 suggests that the Nasdaq Composite Index may be poised for a rally attempt. The daily bars show the COMPQ stabilizing above its early February peak near 4650 (green arrow). The Nasdaq/SPX ratio (solid line) is starting to recover. That shows new Nasdaq leadership. The 14-day RSI line (top of chart) may be about to cross over its 50-line. And daily MACD lines (below chart) look ready to turn positive. The key, however, to a Nasdaq upturn will be its ability to clear its moving average lines. The ability of the blue 50-day line to exceed the red 200-day line would be another positive sign. The Nasdaq is getting some new help from the technology sector which is starting to show relative strength. The Technology SPDR (XLK) gained 1.2% this week versus an S&P 500 gain of 0.28%. A biotech gain of 4.5% also helped the Nasdaq. An upturn in the Nasdaq would most likely lend support to the rest of the market.
