SMALL CAPS RECOVER FROM THURSDAY SELLOFF TO KEEP SIDEWAYS TRADING RANGE INTACT -- NASDAQ RISES TO NEW RECORDS -- AN HOURLY LOOK AT FOUR SECTORS THAT SHOW IMPROVEMENT -- BOND YIELDS PULL BACK TO SUPPORT AND ARE STILL IN UPTREND
SMALL CAPS SURVIVE TEST OF SUPPORT... The stock market continues to trade sideways within the context of an overall uptrend. The fact that small caps stabilized at week's end is an encouraging sign (because they often lead larger stocks). At one point Thursday morning, the Russell 2000 iShares (IWM) traded briefly at the lowest level in a month as major stock averages weakened. An afternoon bounce, however, kept the IWM above short-term support. [The Thursday afternoon rebound also came on heavier trading which is a positive sign]. The daily bars in Chart 1 show the IWM still in five-week trading range. The two short-term momentum indicators on top of Chart 1 also offer encouragement. The 14-day RSI line had reached overbought territory over 70 during the first week of December. Since then, the RSI line has dipped to potential support at 50. In other words, the short-term overbought condition has been alleviated. The two daily MACD lines turned negative four weeks ago and remain so. The MACD histogram bars, however, (which measure the difference between the two lines) are starting to recover. They have to cross back over their zero line to turn the two lines positive. But they appear to be heading in that direction. The IWM along with all other major stock indexes remain well above their 50-day moving averages. Markets can work off overbought conditions in two ways. One is a short-term correction. The other is a sideways consolidation, or trading range. The market appears to be following the second scenario. That increases the odds that the next move with most likely be to the upside.
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Chart 1
NASDAQ SHOWS NEW LEADERSHIP... Another positive sign for the overall market is new leadership from the technology-dominated Nasdaq market. Chart 2 shows the Nasdaq Composite Index surging to record highs this past week every day except Thursday. The Nasdaq/SPX ratio (top of chart) has turned up as well. The uptrend in the Nasdaq shows that the market's trend is still to the upside. The two top tech groups were semiconductors and Internet stocks. FANG stocks (Facebook, Amazon, Netflix, and Google) which I wrote about last weekend had a strong week.
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Chart 2
A CLOSER LOOK AT RECENT ACTION... The next four charts utilize "hourly" bar charts to take a closer look at the recent action on selected sector charts. Chart 3 show the sideways trading action in the Financial Sector SPDR (XLF) over the last five weeks. The XLF has been the market's strongest gainer since the election. The sideways pattern has the look of a consolidation pattern rather than a top. In other words, the next move should be to the upside. Financials were Friday's top gainers on the back of strong bank earnings (and on good volume). But it wasn't enough to push it into new highs. The next three charts show sectors that experienced minor pullbacks over the last month, but are turning back up again. Chart 4 shows the Materials SPDR (XLB) rallying in the new year after pulling back in December. Base metals led that group higher. Chart 5 shows the Industrials SPDR (XLI) starting the year on a stronger note. The XLI was led higher by airlines and rails as the transportation group rebounded. The strongest of the four charts belongs to the Consumer Discretionary SPDR (XLY) which was also the week's top sector (Chart 6). The main point of the last three charts is to show that some market sectors have already experienced minor pullbacks as a way of working off their short-term overbought conditions. The fact that all of them are economically-sensitive stocks is also a good sign.
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Chart 3
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Chart 4
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Chart 5
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Chart 6
BOND YIELDS ARE STILL IN AN UPTREND... While stocks have been stalled in the new year, we've seen a pullback in the 10-Year Treasury yield. The fact that yields have been dipping has boosted Treasury prices which had become oversold. That may have also contributed to softness in stocks. Chart 7, however, doesn't offer a lot of encouragement for bond bulls. It shows the 10-Year Treasury yield pulling back to potential chart support along its November 2015 peak near (flat line) as well as its 50-day average. The chart shows that bond yields are now in an uptrend which is likely to resume sooner or later. When it does, bond prices will suffer and money will start flowing back into stocks. An upturn in bond yields would boost financial stocks (like banks, brokers, and insurers) and probably hurt bond proxies like staples and utilities.
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Chart 7
DELPHI AUTOMOTIVE NEARS BULLISH BREAKOUT... I wrote a couple of bullish messages on auto-related stocks (December 7 and January 4). They included auto makers like GM, Ford, and Tesla as well as used car dealer Carmax. Auto parts were part of that upturn, which included Borg Warner (BWA), Magna International (MGA), and Tenneco Automotive (TEN). Auto parts were among the strongest stocks in the cyclical sector this past week. In looking through that group, I found the following chart which looks promising. Chart 8 shows Delphi Automotive (DLPH) on the verge of breaking through major resistance just below 72. The fact that Delphi belongs to a strong group increases odds for a bullish breakout.
