STOCK INDEXES STALL NEAR SUMMER HIGH -- A LOT OF OVERHEAD RESISTANCE LEVELS ARE BEING TESTED -- TRANSPORTS AND SMALL CAPS BACK OFF ALONG WITH FINANCIALS -- SAFE HAVENS TAKE BACK THE LEAD AS BOND YIELDS DROP -- CONSUMER CYCLICALS ARE WEAKEST SECTOR
STOCK INDEXES STALL NEAR JULY HIGH...Stocks ended the week with minor losses after meeting some resistance along their July high. Chart 1 shows the Dow Industrials consolidating just below their summer high, but remaining well above chart support and moving average lines. Chart 2 shows the S&P 500 in a similar position. Chart 3 shows the Nasdaq Composite Index further below its July high and also ending the week on a soft note. Selling in semiconductors weighed on the technology sector which weighed on the Nasdaq. No serious chart damage was done to any of the major stock indexes and the testing process continues. It's not unusual for prices to stall near a previous peak. And a lot of market sectors and industry groups are doing just that. [Friday's big red volume bars on the three charts were caused by "quarterly witching" which occurs four times a year when options and futures on indexes and stocks expire. That produces higher volume and rising volatility near the end of each quarter].
SMALL CAPS, TRANSPORTS, AND FINANCIALS BACK OFF FROM RESISTANCE...Two of the previous week's biggest gainers also ran into overhead resistance this week. Chart 4 shows the Dow Transports running into selling right at their July peak and dropping -3.32% to make them one of the week's worst performers. A -14% plunge in FedEx was the biggest reason why. But airlines, rails, and truckers also lost ground. Weak transports also weighed on the Industrial SPDR (XLI) which was one of the weakest performers on the week and ended back below its July peak. The XLI had hit a record high the previous week.
Chart 5 shows the Russell 2000 Small Cap Index backing off from a resistance line drawn over its May/July peaks. That also contributed to some hesitation in the stock market's overall advance. A lot of the previous week's buying of small caps came from rising financial shares which are the biggest part of the RUT. Chart 6 shows the Financial SPDR (XLF) also backing off from its summer high. Bank stocks also lost ground this week as bond yields retreated from the previous week's upward spike.
WEEKLY SECTOR RANKINGS TURN MORE DEFENSIVE...The weekly sector rankings in Chart 7 show a more defensive tilt.With bond yields retreating this week, dividend-paying utilities and real estate returned to the top of the week's leader board. The Utilities SPDR (XLU) hit a new record. Energy stocks benefited from the spike in oil prices following last weekend's attack on Saudi oil facilities. Crude oil gave back some of those early gains but ended the week 6% higher. A Friday rebound in pharmaceuticals and biotechs helped the health care sector end on a stronger note. A technology rebound faded due mainly to selling in trade-sensitive chip stocks (more on that shortly). Financials also weakened as bond yields dropped. Consumer discretionary and industrials were the two weakest sectors. Industrials were hurt by falling transportation stocks. While the XLY was weighed down by selling in auto parts and retailers. That was more than enough to offset home builders which hit new highs on the week. Strong June housing sales and a drop in bond yields pushed homebuilders to new highs.
The weekly bars in Chart 8 show the U.S. Home Construction iShares (ITB) ending the week at the highest level since the start of of 2018. Its rising relative strength ratio (solid brown line) shows homebuilders outpacing the broader market all year. Falling bond yields (green bars) have pulled mortgage rates lower all year which has been a big contributor to this year's housing gains.
Chart 9 shows the S&P Retail SPDR (XRT) falling back below its July peak following the previous week's upside breakout. Retailers were the biggest drag on the XLY. The biggest losses came in apparel and clothing stocks and specialty retailers.The XRT also ended back below its 200-day moving average. The solid red line shows retailers lagging behind the market until September when the group surged higher. This week's downturn casts some doubt on the sustainability of the retail September rebound.
SEMICONDUCTORS BACK OFF FROM SUMMER HIGH...Chart 10 shows the PHLX Semiconductor iShares (SOXX) ending week on a down note after meeting resistance along their late July peak (red circles). Falling chip stocks more than offset gains in software shares, and contributed to selling in technology shares and the Nasdaq on Friday. SOXX remains well above important moving average lines which keeps its uptrend intact. The two upper boxes, however, show the 14-day RSI and MACD lines trading below their July peaks which form potential "negative divergences" and suggest a short-term loss of upside momentum. That's not enough to end the rally in trade-sensitive chip stocks. But it may be enough to stall their advance for awhile longer.
