STOCK INDEXES ARE DRAWING SUPPORT FROM WEAKER PARTS OF THE MARKET -- THAT INCLUDES ENERGY, FINANCIALS, RETAILERS, SMALL CAPS, AND TRANSPORTS -- GOLD PULLS BACK FROM OVERBOUGHT CONDITION, BUT REMAINS ABOVE BREAKOUT POINT
SMALL CAPS ARE RISING AGAIN ... With the three major stock indexes hitting record highs yesterday, attention remains focused on market leaders. To me, the bigger story may be the resurgence of weaker parts of the market that have been holding it back. Small caps are at the top of the list. Chart 1 shows the Russell 2000 iShares (IWM) climbing to the highest level in six weeks. Relative weakness in small and midcap stocks weighed on the market during August. Not anymore. The IWM/SPX ratio (top of chart 1) shows small caps actually rising faster than large caps during September. That's a good sign.
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Chart 1
TRANSPORTS ARE ALSO CLIMBING... Chart 2 shows the Transportation Average iShares (IYT) also trading at the highest level since July. It reclaimed its 200-day average in late August and has climbed back over its 50-day line. The IYT has also cleared its mid-August peak. The relative strength ratio on top of Chart 2 shows the Dow Transports gaining ground on the Dow Industrials during September. That's lending support to the overall market rally.
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Chart 2
SO ARE RETAILERS... Chart 3 shows the S&P Retail SPDR (XRT) surging since the middle of August to the highest level in a month. The XRT still faces overhead resistance along its early August peak and its 200-day moving average (red line). Apparel retailers are leading it higher today. The XRT/SPX ratio on top of Chart 3 show retailers doing better than the S&P 500 over the last month. It's too soon to call the XRT upturn a bottom. But the recent climb in this group is a welcome change from its weak performance since the start of the year.
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Chart 3
EVEN ENERGY IS REBOUNDING... Energy has been the market's weakest sector this year. But it's today's strongest sector, and the third strongest over the last month (behind healthcare and materials). Chart 4 show the Energy SPDR (XLE) trading at the highest level in a month after climbing back over its 50-day average. It still has a way to go to reach overhead resistance at its late July peak, and remains well below its 200-day line. But it's showing relative strength for the first time in several months. That's tied to a rebound in energy prices over the last month.
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Chart 4
FINANCIALS ARE HAVING A STRONG WEEK... Another positive sign for the market is this week's rebound in financial shares. Chart 5 shows the Financial Sector SPDR (XLF) rebounding sharply off its 200-day moving average, and may be about to cross over its 50-day line. Its relative strength ratio (top of chart) is also rebounding for the first time in a month. A rebound in bond yields this week is lending support to banks, while insurers are bouncing on relief that hurricane damage wasn't as bad as expected.
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Chart 5
OVERBOUGHT GOLD MARKET IS PULLING BACK... With stocks in rally mode this week, safe havens like bond prices, the Japanese yen, and gold prices are pulling back . Chart 6 shows the Gold Shares SPDR (GLD) retracing some of its recent gains. Its 14-day RSI line (top of chart) is also pulling back from overbought territory over 70. For gold bulls, the good news is that the GLD remains well above its peaks formed in April and June. Those broken peaks should provide support below the market. That potential support translates to $1300 for the actual commodity.
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Chart 6
MARKET BREADTH STILL NEEDS TO SHOW MORE IMPROVEMENT... One way to measure market breadth is to track the percent of NYSE stocks trading above their moving average lines. The blue line in Chart 7 shows the percent of NYSE stocks above their 50-day average. The line fell below 40% during August which was the lowest point since last November. It has since climbed to 64% which is encouraging. But that's still well below its August peak at 75%. The red line in Chart 8 shows the percent of NYSE stocks trading above their 200-day average having recently fallen to 55% which matched the low reached last November. It survived an important test of that previous low, and has since climbed to 62%. But that remains well below its July peak near 70%. Although it's good to see the red line rising, it is disturbing to note that it has formed a pattern of lower peaks since last September when it reached 80%. During those twelve months that the red line was dropping, the NYSE Composite Index gained 12%, versus a gain of 15% for the S&P 500. And both stock indexes are hitting record highs. I'd feel more confident about the longevity of the uptrend in the major stock indexes if the blue and red lines were showing more impressive gains as well.
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Chart 7
