STOCK INDEXES ARE ENDING AUGUST ON A STRONG NOTE -- WITH THE NASDAQ BACK IN THE LEAD -- TECHNOLOGY AND BIOTECH ETFS HIT NEW HIGHS -- HEALTHCARE IS WEEK'S STRONGEST SECTOR -- SMALL CAPS AND TRANSPORTS ARE REBOUNDING
STOCKS ARE ENDING THE MONTH ON A STRONG NOTE ... Although the month of August will still go down as the weakest month of the year, stock indexes appear to be ending the month on a strong note. And all of them are showing short-term technical improvement. Chart 1, for example, shows the Dow Industrials trading at a two-week high after bouncing twice off its 50-day average. The INDU has also cleared its 20-day average (green line). The same is true of the other major stock indexes. Chart 2 shows the S&P 500 rising even faster than the Dow (more on that shortly). While Chart 3 shows the Nasdaq Composite Index looking even stronger. The Nasdaq has gained more than 2% this week and is the strongest of the three major indexes. That's due mainly to a new high in technology stocks and a jump in biotech stocks. The S&P 500 is coming in second with a weekly gain of more than 1%. The Dow's weekly gain of 0.71% is the smallest of the three. Prior to the August downturn, I warned that Dow leadership is usually a sign of market caution. That's why it's encouraging to see the Nasdaq leading again and the Dow lagging behind.
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Chart 1
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Chart 2
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Chart 3
BIOTECH AND TECHNOLOGY ETFS HIT NEW HIGHS... Technology has regained its role as a market leader. Chart 4 shows the Technology SPDR (XLK) hitting a record high this week. Biotechs are also breaking out. Chart 5 shows the S&P 500 Biotech SPDR (XBI) reaching the highest level in two years. That's helping making healthcare the week's strongest sector. Chart 6 shows the Health Care SPDR (XLV) rising to the highest level in six weeks. The XLV/SPX ratio (solid line) is also rising.
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Chart 4
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Chart 5
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Chart 6
SMALL CAPS AND TRANSPORTS IMPROVE... It's also encouraging to see new buying in small cap stocks and the transports which have been the weakest parts of the market during August. Chart 7 shows the Russell 2000 iShares (IWM) rising to the highest level in three weeks and back above its 200-day moving average. It's trying to clear its (blue) 50-day line. Chart 8 shows the Transportation Average IShares (IYT) back above its 200-day line as well. It too needs to clear its 50-day line. Truckers were transport leaders with Landstar (LSTR) hitting a record high.
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Chart 7
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Chart 8
GOLD MINERS ARE RISING FASTER THAN GOLD... My Tuesday message showed the bullish breakout in gold above $1300 which is still holding. I ended that message with the observation that gold miners were doing even better than the metal which is a positive sign for gold. That's because miners usually rise faster than the metal in an uptrend. And they are. The brown bars in Chart 9 show the VanEck Gold Miners ETF (GDX) having a strong week as well. In fact, the GDX has had a better week than than the Gold SPDR (GLD) by a 4.8% to 2% margin. That trend can be seen by the rising GDX/GLD ratio in Chart 9 (solid area) which jumped during August. The GDX has gained 17% this year versus a GLD gain of 14%. Chart 10 shows the GDX/GLD ratio rising even more sharply since the start of 2016. During that period, the GDX outpaced GLD by a 79% to 23% margin, So there are two messages herein. One is that it's a good sign for the metal when miners are leading it higher. Which they are. The second message is that gold miners are usually a stronger way to play any upturn in gold. There is also a third message which I almost hesitate to mention. Gold and its miners are outperforming the S&P 500 this year. That's the first time that's happened since 2011. A weak dollar and low bond yields are two reasons why. I suspect another is that investors are rotating some money into gold assets as a hedge against a bull market that's in its ninth year. Gold prices are also outperforming bonds for the first time in six years. That makes gold a viable alternative to bonds and stocks.
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Chart 9
