SMALL CAP LEADERSHIP IS AN ENCOURAGING SIGN -- STOCK INDEXES CLEAR DECEMBER HIGH -- KEEPING AN EYE ON BOND YIELDS
SMALL CAP LEADERSHIP... The last couple of messages have shown improvement in market breadth. That improvement was reflected in rising advance-declines lines and percent of stocks over moving average lines. Here's another example of improving breadth in the form of small cap leadership. The daily bars in Chart 1 show Russell 2000 iShares (IWM) rallying all the way to its August high. Meanwhile, the large cap S&P 500 has lagged behind. Small cap leadership is reflected more graphically in the IWM:SPX relative strength ratio in the upper box which has been rising since the start of the year and has just exceeded its November high. Small cap leadership usually coincides with rising advance-decline lines. That's because there are more small caps than large caps in the broader stock market and, as a result, small cap leadership usually improves market breadth. Chart 1 also shows the IWM 50-day average rising above its 200-day line to form a "golden cross" which is another positive sign for small caps.
S&P 500 REACHES SIX-MONTH HIGH...Large cap stocks had another good week and continue to show technical improvement. Chart 2 shows the S&P 500 rising above its December high to reach the highest level since August. The SPX also rose in heavier trading which is a positive sign. Its blue 50-day average is close to rising above its red 200-day which would be another positive development. The only cautionary note is its 9-day RSI line in the upper box reaching overbought territory above 70. The Nasdaq market also had a strong week. Chart 3 shows the Invesco QQQ trust also rising to a new six-month high. The tech-led QQQ also rose faster than the broader market which reflects strong buying of beaten down technology shares. Falling bond yields contributed to that buying.
STRONG JOBS REPORT CAUSES PROFIT-TAKING... Stocks in general saw some profit-taking on Friday on news that the January jobs report came in much stronger than expected. That unexpected strength in jobs raised concerns that the Fed may need to continue raising rates and keep them higher for longer. That strong report also boosted interest rates and caused some profit-taking in bonds. Bond yields are also at an important support line.
BOND YIELD TESTS 200-DAY LINE... Chart 4 shows bond yields in decline since October. That decline has coincided closely with the stock market rally. The chart, however, shows the 10-Year Treasury yield bouncing today off its 200-day moving average (red arrow). Friday's uptick in interest rates resulted from the strong January jobs report which contributed to profit-taking in bonds and stocks. It remains to be seen if the TNX finds support at that important support line. That could have some influence on stock values.
