STRONG TECH SECTOR CONTINUES TO SUPPORT MARKET -- FINANCIALS, CYCLICALS, AND INDUSTRIALS ARE ALSO LEADING -- SMALLS CAPS LOOK STRONGER -- AMERICAN AIRLINES AND KANSAS CITY SOUTHERN LEAD TRANPORTS HIGHER
TECHNOLOGY SECTOR CONTINUES TO SUPPORT MARKET ... My last sentence from yesterday's message was that the stock market was unlikely to suffer any serious short-term damage as long as technology stocks kept rising. That's because technology is such a big part of the stock market. And they're rising again today. The daily bars in Chart 1 show the Technology Sector SPDR (XLK) remaining above its 20- and 50-day moving average lines and gaining more ground today. Technology leadership is reflected on a relative strength basis as well. The green line on top of Chart 1 shows the XLK:S&P 500 ratio rising above its November high to a new record. Technology strength is usually a good sign for the rest of the market. Several other sectors are also acting well.
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Chart 1
THREE MORE ETFS SHOWING RELATIVE STRENGTH ... It's also encouraging to see three of the more economically-sensitive sectors showing relative strength. Chart 2 shows the Financial SPDR (XLF) trading over its 20- and 50-day moving average lines. The rising gray line shows the XLF/SPX relative strength ratio rising to a new high. Financials are of course benefiting from rising bond yields. Chart 3 shows the Consumer Discretionary SPDR (XLY) trying to rise above its 20-day average in today's trading. Its relative strength ratio (gray line) held up very well during the recent market correction. Chart 4 shows the Industrials SPDR (XLI) trying to clear its 20- and 50-day lines as well. The XLI is being led higher today by transportation stocks (more on that shortly). The fact that all three are tied to a stronger economy is a positive sign for the market. On the flip side of that, it's also encouraging to note that the three weakest sectors during February have been defensive bond proxies like consumer staples, utilities, and REITS. Those stocks usually do better in a serious market downturn. The fact that they're not sends a positive market message. So does the fact that the CBOE Volatility (VIX) Index is back below its historical average at 20.
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Chart 2
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Chart 3
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Chart 4
SMALL CAPS ARE ALSO ACTING BETTER ... Small cap stocks are also having a strong day. The daily bars in Chart 5 show the Russell 2000 iShares (IWM) trying to clear their 50-day average. They're also starting to show some relative improvement. That can be seen by the gray line which has started to rise over the past couple of weeks. Small caps may be getting some help from the dollar which has been bouncing over the last week. [A weak dollar usually favors large multinationals that do a lot of business abroad. A rising dollar favors smaller stocks].
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Chart 5
AMERICAN AIRLINES AND KANSAS CITY SOUTHERN LEAD TRANSPORTS HIGHER ... Transportation stocks are having a strong day. The next two charts show two of the reasons why. The daily bars in Chart 6 show American Airlines (AAL) climbing more than 3% today and trading back over its 50-day average. Airlines are one of the strongest parts of the transports. Chart 7 shows Kansas City Southern (KSU) also trading over its 50-day line. It's usually a good sign for the stock market when economically-sensitive transportation stocks are doing better.
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Chart 6
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Chart 7
STOCKS MAY BE IN FOURTH WAVE CONSOLIDATION PATTERN ... My message from January 6 expressed concern about the fact that the S&P 500 was well into its fifth Elliott Wave advance that started in March 2009. Elliott Wave analysis is built on the idea that bull markets have five waves which break down into three upwaves (1,3,5) and two intervening corrective waves (2 and 4). The red box in Chart 8 shows the last serious market correction that lasted from August 2015 to February 2016. My August 22 message from that year carried the headline: "Stocks Have Entered a Wave 4 Correction". That meant that the market still had another upwave to go before completing a five-wave bull market sequence. That final upwave should itself form five waves. The blue numerals in Chart 8 show my interpretation of that advance since the early 2016 bottom. And it looks incomplete. Waves 1 and 2 during the second half of 2016 look pretty clear. The third wave, however, that lasted from November 2016 to this January was absent any notable correction or consolidation. So I'm defining that as a long wave 3. If I'm right, that would make the current market weakness a wave 4. The fact that the February correction bounced off its major up trendline appears to support that view. What does that mean? Wave 4 consolidation patterns are often "triangular" in shape. That would suggest the market trending sideways between its recent highs and lows for several weeks or months (the last correction lasted three months). That could pave the way for another fifth (and possible final) upwave. There's good and bad news in that analysis. The good news is that the bull market probably isn't over. The bad news is that the next upleg (if and when it occurs) could be the last one in a bull market nearing its ninth anniversary in March.
