STOCK INDEXES PULL BACK FURTHER FROM SUMMER HIGH -- NASDAQ CONTINUES TO LOSE LEADERSHIP ROLE AS TECHNOLOGY SECTOR WEAKENS -- INTERNET STOCKS PULL COMMUNICATION SECTOR LOWER -- SELLING OF CHINESE STOCKS WAS A FACTOR -- BUT FACEBOOK ALSO HAD A BAD WEEK
NASDAQ ENDS BELOW ITS 50-DAY AVERAGE...While the three major U.S. stock indexes pulled back further from their July high, the Nasdaq was by far the weakest performer. Chart 1 shows the Nasdaq Composite Index ending the week well below its 50-day moving average (blue line). In addition, its daily MACD lines (lower box) turned negative; while its 14-day RSI line (upper box) slipped below 50. All of which increases the chances for more short-term weakness. Having fallen short of a retest of its July high, the Nasdaq could be headed toward a retest of support along its August low, and maybe even its 200-day average (red line). So far, no major damage has been done to its long-term uptrend. And that will remain true as long as those support levels hold.
Chart 2 shows the Dow Industrials still trading above its 50-day moving average. While Chart 3 shows the S&P 500 sitting right on its blue line. It remains to be seen if selling in the Nasdaq market spills over to the other two stock indexes next week. So far, chart damage to the broader market has been relatively minor. But renewed selling in small caps is a concern. Along with falling chips.
Semiconductors were the biggest tech losers on Friday due partially to increased trade tensions with China. A report that the White House was considering de-listing Chinese stocks traded in the U.S. took a big toll on those stocks most of which are traded on the Nasdaq. That weakened Internet stocks which led the communication sector sharply lower.
INTERNET STOCKS LEAD COMMUNICATION SECTOR LOWER...Chart 4 shows the Communication Services SPDR (XLC) ending the week well below its 50-day moving average. The XLC was the week's worst performer (-2.9%). And most of that selling came from Internet stocks. Chart 5 shows the Dow Jones US Internet Index ending the week below its 50-day line as well, and falling closer to its August low. The falling trendline shows that its September rally also fell well short of its July peak, which reflects relative weakness. Some of Friday's selling came from Chinese stocks. But some prominent U.S. stocks also weakened.
Chart 6 shows Facebook (FB) falling all the way back to its summer low and its 200-day average (red arrow). That also reflects poor relative performance. The Facebook/S&P 500 ratio (red line in upper box) peaked in July and has fallen to the lowest level since early June. That reflects relative weakness. Facebook is also a part of the so-called FAANG group which has also come under pressure of late. Which may be part of a recent rotation out of technology growth stocks into more value stocks like financials. The big question for the market is whether money rotating into financials is enough to offset money leaving tech and Internet related stocks.
ROTATION OUT OF GROWTH INTO VALUE...A lot has been written over the last month about the rotation out of technology-dominated growth stocks into value stocks of which financials are the biggest part. The two lines in Chart 7 compare the relative performance of both over the past year. The red line is a ratio of Russell 1000 Growth iShares (IWF) divided by the S&P 500. That line peaked in late August and has continued to weaken. That primarily reflects selling in technology stocks which make up the biggest part (37%) of the IWF. The green line is a ratio of the Russell 1000 Value iShares (IWD) divided by the S&P 500. That line turned up in late August at the same time that the red line started dropping. That mainly reflected strong buying in financial stocks which are the biggest part of the IWD (23%). And, to a lesser extent, industrial stocks. So far, those rotations aren't big enough to signal a major lasting shift in market leadership. The bigger question for the market, however, may be whether any gains in financials (and industrials) are enough to offset any further losses in technology and Internet stocks.
FINANCIALS TEST OVERHEAD RESISTANCE...Financials have played a major role in the recent rotation into value stocks. The question is will that continue. The black weekly bars in Chart 8 show the Financial Sector SPDR (XLF) testing major overhead resistance along its late 2018 highs (black trendline). That's an important barrier that needs to be overcome if the financial rally is to continue. The green line is a relative strength ratio of the XLF divided by the S&P 500. The falling green line from the start of 2018 to this March shows how much financial stocks lagged behind the rest of the market. Since March, however, the ratio has trended sideways and formed a "higher low" during August. And it's now testing the highs formed during the spring and summer. A decisive upside breakout by the XLF/SPX ratio would signal that the recent upturn in financial stocks has more staying power. So would an upside breakout by the weekly price bars. That could help determine if the recent rotation into value stocks has staying power. And the direction of financial stocks could also have some bearing on the direction of stocks in general. That's especially true if the recent loss of leadership by technology stocks continues and becomes more lasting. For the bull market in stocks to continue, loss of leadership by one group of stocks needs to be replaced by leadership somewhere else.
