ANOTHER LOOK AT TRANSPORTATION STOCKS -- FEDEX TURNS UP -- UPS MAY BE NEXT -- MEXICO ISHARES BOUNCE OFF CHART SUPPORT -- CONSUMER DISCRETIONARY SPDR BOUNCES OFF 200-DAY LINE -- CYCLICALS/STAPLES RATIO APPEARS TO BE BOTTOMING
TRANSPORTATION ISHARES STILL LOOK POSITIVE... My market message from three weeks ago (Wednesday, September 7) showed Transportation iShares climbing to a five-month high. I took that as a sign that transportation stocks were on the verge of an upside breakout. A pullback in the transportation group since then has prevented an upside breakout (see circle). But they may be getting ready for another try. The daily bars in Chart 1 show the Transportation iShares (IYT) backing off from their April peak over the last three weeks. But they're back above their 50-day average and are rising again. An upside breakout through their April/September peaks is necessary to achieve an upside breakout. That would be a positive sign for them and for the market as a whole. The IYT/SPX ratio (top of chart) has been rising since the start of August. That's another encouraging sign.
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Chart 1
AIRLINES ARE HAVING A STRONG DAY ... That earlier message pointed out that airlines have been the weakest part of the transportation sector. They're showing the biggest gains today, however. Chart 2 shows the Dow Jones US Airlines Index ($DJUSAR) rising more than 2% after finding support at its 50-day average (blue line). Although the index appears to be bottoming, it needs to clear its July peak and its 200-day average (red line) to turn its trend higher. Airlines have been the biggest drag on the sector. An upturn in that group would go a long way toward boosting the transports.
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Chart 2
FEDEX LEADS AIR FREIGHT INDEX HIGHER... Rails and truckers have been transportation leaders. So have air freight stocks. Chart 3 shows the Dow Jones US Delivery Services Index ($DJUSAF) climbing to the highest level since the start of 2015. The air freight/ S&P 500 ratio (top of chart) appears to be on verge of an upside breakout as well. That's a good sign for this economically sensitive group. FedEx is the current air freight leader. UPS isn't far behind.
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Chart 3
FEDEX BREAKS OUT -- UPS MAY BE NEXT... The daily bars in Chart 4 show FedEx (FDX) gapping up through its April high to achieve a bullish breakout. And it did so on rising volume. The FDX/SPX ratio (top of chart) has broken out as well. United Parcel Service (UPS) may be next. The daily bars in Chart 5 show UPS consolidating within a bullish looking "symmetrical triangle". That bullish continuation pattern is identified by the two converging trendlines, and is usually resolved on the upside. Its relative strength ratio (top of chart) has been rising all year.
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Chart 4
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Chart 5
MEXICO ISHARES REBOUND OFF JUNE LOW... Following the first U.S. presidential debate last night, I thought it might be a good time to revisit the Mexican market. That's because the upcoming election may be having some influence on Mexico. Back on August 9, I wrote a message suggesting that Mexico iShares (EWW) were turning higher. At the time, the EWW was testing its spring high (red circle) and appeared to be on the verge of a bullish breakout. Part of that bullish view was based on signs of strength in the Mexican Peso. [A foreign stock ETF does better when its local currency is rising]. The bullish breakout didn't happen, and the EWW has fallen since then. Part of the reason for its weakness has been the drop in the Mexican Peso (green line) to a new low against the U.S. dollar. Both are jumping today, however. The red bars in Chart 6 show the EWW bouncing sharply off previous chart support at its June low. The Peso (green line) is bouncing as well. That's apparently based on the view that Hillary Clinton may have won the debate. It's believed by some that a Trump victory would threaten the economic relationship between the two countries which would hurt Mexico. In any event, it remains to be seen if the EWW can build on today's gains.
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Chart 6
CONSUMER DISCRETIONARY SPDR BOUNCES OFF 200-DAY LINE... One of the encouraging market signs is that the Consumer Discretionary SPDR (XLY) is finding support at its 200-day moving average (Chart 7). That's encouraging because the XLY is one of market's most economically-sensitive sectors. It still needs to clear its 50-day average (blue line) to improve its short-term trend. But its 14-day RSI (black line) has bounced off oversold territory at 30 and may be on the verge of clearing its midline at 50. The XLY/SPX relative strength ratio (top of chart) has been dropping since May. The market usually does better when the XLY is showing relative strength, not weakness. A break of its falling trendline would be a good sign for both.
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Chart 7
CYCLICALS/STAPLES RATIO MAY BE BOTTOMING ... During the past weekend's Chartcon 2016, I had a friendly debate with my colleague Tom Bowley about the following chart. Chart 8 plots a "ratio" of the Consumer Discretionary SPDR (XLY) divided by the Consumer Staples SPDR (XLP). The direction of the ratio can tell us something about the state of the market. As a rule, the market usually does better when cyclicals are doing better than staples (a rising ratio). The ratio, however, remains well below its peak formed last November. That's a potentially negative sign because it shows that investors have favored defensive stocks over economically-sensitive ones. [Although staple buying has been driven largely by a search for yield]. The debate was over the current direction of the ratio. I took the view that the ratio has bottomed which is supported by the fact that it has risen above its 200-day average for the first time this year (red circle). Tom felt that the ratio needed to clear its April high to signal a bottom. We both agreed, however, that an upturn in the XLY/XLP ratio would be a positive sign for the market. Hopefully, we'll both be right.
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Chart 8
NASDAQ 100 CONTINUES TO LEAD MARKET HIGHER... The fact that the technology-dominated Nasdaq 100 is leading the market higher is a positive sign for both. Chart 9 shows the Power Shares QQQ trading well above its 50-day average. The QQQ/SPX ratio (top of chart) shows it outpacing the S&P 500 by a wide margin. That's helping pull the SPX higher. Chart 10 show the S&P 500 continuing to bounce off chart support along its June peak (see green arrow). Its 14-day RSI line (top of chart) to close to clearing its 50 line. In addition, its daily MACD lines (below chart) have turned positive for the first time since the end of July. Technology, consumer discretionary, financials, and industrials are the day's top sectors. The Industrial SPDR (XLI) is being led higher by the transports. Stocks continue to get a boost from from lower bond yields. The 10-Year Treasury yield has fallen to 1.56% and has slipped below its 50-day line for the first time in a month.
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Chart 9
