DOW AND S&P 500 HOLD THEIR GAPS -- NASDAQ HOLDS ITS 50-DAY LINE -- SMALL CAPS TURN UP -- SO DO FINANCIALS -- VALUE/GROWTH RATIO MAY BE BOTTOMING
MONDAY BREAKOUTS ARE STILL INTACT... Stocks are ending the week on a firm note; and are holding onto upside gap breakouts achieved earlier in the week. Stock indexes have spent the week consolidating their sharp gains on Monday and are remaining above some chart support levels. Chart 1 shows the Dow Industrials finding support along its mid-October peak near 29,000. The Dow has also held onto most of the upside gap formed on Monday following encouraging news on the vaccine front and is the week's biggest gainer. Chart 2 shows the S&P 500 pulling back on Tuesday and Thursday but finding support at the lower end of the upside gap formed on Monday. That's an encouraging sign and keeps Monday's upside breakout intact. The Nasdaq market was the weakest of the three indexes owing to profit-taking in technology and stay-at-home stocks. But its losses have been contained.
Chart 3 shows the Nasdaq Composite Index reversing lower on Monday from its early September peak as investors rotated into value stocks and out of growth. But the chart also shows this week's Nasdaq pullback remaining above its 50-day moving average. So no serious chart damage was done to the Nasdaq uptrend. It's also encouraging to see it rebounding again on Friday along with the rest of the market.
The bigger news this week may be what happened beneath the surface in different market groups. That includes the buying of value stocks at the expense of growth; the strong buying of small cap stocks; and the buying of financial stocks which were one of the week's strongest sectors.
SMALL CAPS SHOW NEW LEADERSHIP... Small cap stocks did much better than large caps over the past week. The daily bars in Chart 4 show the Russell 2000 iShares (IWM) gapping into record territory on Monday. And then managing to hold onto that breakaway gap throughout the rest of the week. The upper box plots a ratio of the IWM divided by the S&P 500, and shows the ratio rising to the highest level in eight months. Small cap leadership is usually a vote of confidence in the stock market and the economy. For the record, however, it's important that the IWM (and other indexes shown here) manage to stay above the upside gaps formed on Monday.
FINANCIALS HOLD BULLISH BREAKOUT... Financials stocks were another big story this week. Chart 5 shows the Financial SPDR (XLF) gapping up on Monday to clear its June peak and reach the highest level in nine months. And then managing to hold onto that breakout (and upside gap) throughout the rest of the week. Its relative performance was also encouraging. That can be seen by the week's upside spike in the XLF/SPX ratio shown in the upper box in Chart 5 (see arrow). Financials form a big part of the so-called value trade and had, up until this week, been market laggards. That may be changing for the better for them and value stocks in general.
BUYING VALUE...The biggest story of the week was the rotation into value stocks. Chart 6 shows the S&P 500 Value iShares (IVE) gapping above its June/September highs to reach a nine-month high. The circled area shows it holding onto most of that upside breakout through the rest of the week before rebounding on Friday. Upside gaps can be tricky things. That's because it's hard to tell the difference between "breakaway gaps" which are bullish and "exhaustion gaps" which aren't. The only way we can tell them apart is the market's ability to stay above the gap area. So far that appears to be the case. It would take a drop below the entire gap to negate the bullish breakout.
VALUE/STOCK RATIO MAY BE BOTTOMING... The solid line on Chart 6 plots a ratio of S&P value stocks versus growth (IVE/IVW ratio). And it jumped sharply this week. The value/growth ratio fell throughout the year as large tech stocks dominated the year's stock advance. The ratio, however, hit bottom in early September and again in early November. That potential "double bottom" in the ratio and this week's sharp advance suggests the value/growth ratio may be bottoming and that this week's rotation into value stocks has some staying power behind it.
