S&P 500 TESTING AUGUST HIGH -- SMALL CAPS TURN UP -- XLY ACHIEVES UPSIDE BREAKOUT -- SO DO TESLA AND FORD
S&P 500 TESTS AUGUST HIGH...Chart 1 shows the S&P 500 Index in the process of testing important overhead resistance at its August high (flat line). A close above that barrier would be a positive sign. The SPX has now gained 20% from its October low. Narrow market breadth had been casting doubt on the strength of the overall market. Last week's message, however, pointed out the the market rally was showing signs of broadening out. That improvement was demonstrated by new signs of leadership in more economically-sensitive cyclical stocks like consumer discretionary stocks (more on that shortly) and smaller stocks. That positive trend in those two groups continued this past week.
SMALL CAPS TURN UP... The divergence between weaker smaller stocks and the S&P 500 Large Cap Index throughout the spring was one of the areas of concern. But that situation has improved over the past week. Chart 2 shows the Russell 2000 iShares (IWM) rising this week to the highest level in three months. In addition, the IWM is back above its major moving average lines which puts it back in sync with larger stocks. That can be seen more clearly in Chart 3.
SMALL STOCKS BACK IN SYNC WITH SPX...Two of the lines in Chart 3 compare the Russell 2000 iShares of smaller stocks (black line) to the S&P 500 large cap stocks (green line) over the last year. The chart shows the generally positive correlation between the two lines. In other words, they generally move in the same direction. Between March and May, however, the S&P 500 rallied while small caps stayed flat. That divergence between the two was unusual. Part of the reason for small cap weakness was a plunge in banking shares which are heavily weighted in the IWM (red line). Bank shares bottomed in early May which gave a boost to smaller stocks and both have rallied together since then. The past week's upside breakout in the Russell 2000 has put it and the SPX back in sync on the upside.
XLY BREAKOUT LEAD BY TESLA AND FORD...Previous messages have highlighted consumer discretionary stocks as one of the market's strongest sectors outside of technology and communication services. In fact, they've been the market's strongest sector for the second week in row, and have achieved an impressive bullish breakout. Chart 4 shows the XLY climbing above its February peak to reach the highest level since last September. And as has been the case over the last two weeks, auto stocks have led it higher. The May 26 message showed Tesla and Ford nearing potential upside breakouts. Charts 5 and 6 show both auto leaders achieving impressive upside breakouts since then. Tesla, however, is now in deeply overbought territory. The flip side of consumer discretionary leadership is the fact that defensive consumer staples were the week's weakest sector. That's normally a good sign that investors are turning more optimistic.
