Weekly Technical Market Outlook 9/15/2014

As the bond-stock relationship continues to evolve, we saw a big drop in bond prices while U.S. stocks also took their punches. The S&P 500 ($SPX) finished the week down 1.10%, Small Caps dropped 0.87%, and Commodities ($DBC) continued their slide with a -3.5% move last week.

In last week’s Technical Market Outlook I showed a chart of the ratio been the U.S. Dollar and Emerging Market Currency Bonds and how this ratio has often led the Treasury market. The ratio between the Dollar and these Currency Bonds had created a divergence, which I noted may lead to the 10-Year Treasury Yield also rising. In fact, last week we saw the Treasury yield advance by 6.22%, the largest one week increase since September ’13. The Relative Strength Index inched into ‘overbought’ territory on Friday for $TNX, so I’m curious if bond bears are able to keep the party going or if we see some consolidation or decline in yield this week.

Trend

While we saw a 1% drop in stocks last week, the trend is still positive for the S&P 500. Price is now under its 20-day Moving Average but we are still firmly above the 100-day MA and the rising trend line.

Trend

Relative Rotation Graph

I’ve shown the Relative Rotation Graph a couple of times on the blog, and every couple of weeks I’ll do an update to see how the sectors are moving. As a reminder this tool shows the momentum of the trend of relative strength and is plotted on the Y-axis and the trend of relative strength is then plotted on the X-axis. The sectors typically move in a clockwise fashion as their relative performance vs. the S&P 500 rises and falls and the momentum of that performance also rises and falls. Click the hyperlink above to read more.

Health Care ($XLV) and Technology ($XLK) continue to advance in the ‘Leading’ category. While Financials ($XLF) have not been a stellar performer this year, it’s been making good improvement over the last several weeks. I’ll be discussing this sector later in the post. Energy ($XLE) which had been the best performing sector for a couple of weeks this year, has been moving fast as it left the ‘leading’ category and has fallen hard in the ‘weakening’ category.

RRGBreadth

Last week I discussed the divergences that were taking place in both breadth and momentum and how they could cause some headwinds for stock prices but were not extreme divergences and thus were unlikely to be signaling major bearishness. The decline in the Advance-Decline Line has continued. What concerns me is the short-term trend line that had acted as support appears to now be resistance.

Breadth

Momentum

Like breadth, momentum continues to weaken as prices fell last week. The Relative Strength Index (RSI) remains above support that was created on previous declines and currently is testing its midpoint which may act as support – we’ll see.

Momentum

Financial Sector

I tweeted out on Friday the chart below, but I wanted to also show it here today.  The following chart is the relative performance line between the Financials Sector ($XLF) and the S&P 500 ($SPY) on a monthly basis going back to 1999. The top panel shows the width of the Bollinger Bands around the ratio of these two ETFs. Typically when the bands contract a large move follows. Think of a coil as it contracts. We are now seeing the Bollinger Bands for this ratio contracting to the tightest range since 2007 and 2004. This led to a massive under-performance of Financials and of course the eventual Financial Crisis in 2008.

So does this chart signal a coming crisis? Of course not. What it does tell us is that a possible large move may be coming as the Bands tighten. However, we can not use the width of the Bollinger Bands to estimate the direction of the move.

XLF

Regional Banks

In the Relative Rotation Graph we saw that $XLF has been improving and in the above chart we can see the Bollinger Bands for the ratio between $XLF and $SPY has narrowed considerably. Now lets take things a step further and look specifically at Regional Banks ($KRE).

Again, we are looking at the relative performance against the S&P 500 with the ratio of $KRE and $SPY. At the end of August we saw this line test its previous low in May ’13. We also began to see a positive divergence in the Relative Strength Index (RSI) indicator, which is shown in the top panel of the chart below. This told us that we may see a change in trend as Regional Banks improve in relative performance. Price eventually confirmed the bullish divergence in momentum and has now broken its falling trend line as $KRE outpaces $SPY.

KRE60-Minute S&P 500

Last week I highlighted the negative divergences that were being created in the RSI and MACD momentum indicators and that I was watching to see if 1990 could hold up as support for the S&P 500 on the 60-minute chart.

We ended up closing out the week under 1990 as price created a falling channel. While the 1% drop in the S&P last week is far from terrifying, we have yet to see momentum break into ‘oversold’ territory as it has during previous dips, so it’s possible traders may not be doing selling.

Some may see the lack of lower lows in the RSI indicator as a possible bullish divergence, and they would be correct, however divergences that take place between 70 and 30 are typically less reliable in my opinion but I suppose it’s still good to note.

60 minLast Week’s Sector Performance

Last week the Technology sector and Financials showed to be the best performers. While Energy and Utilities were the worst performing sectors. It’s interesting to see the two sectors that had been the strongest during the start of the year now being sold off. This is a great example of traders rotation out of strength and into the under-performing spaces like Financials.

week sector

Year-to-Date Sector Performance

Health Care remains the best performer for 2014 and Tech has now moved into the number two spot for the year, edging out Utilities. With these three sectors showing 5-8% out-performance of the S&P for this year, they have also moved well ahead of the other six sectors.

YTD sector

 

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Are Traders Already Preparing For a Rate Hike?

While it seems investors can’t get enough commentary on the eventual Fed Funds Rate increase, it seems they may already be positioning for Yellen to breath the dreadful word… “tightening.”

Josh Brown put up a great table (shown below) prepared by Savita Subramanian’s of BoAML showing sector relative performance going into and during the past three rate hikes. While telecom and utilities are often thought of as the worst performing sectors during the periods of time of Fed tightening interest rate policy, Subramanian’s research shows another sector that traders may want to keep an eye on – Consumer Discretionary (XLY). Over the last three rate hike cycles, the Discretionary sector shown no relative performance strength, which is actually worse than the Telecom and Utility sectors.

Sector rate hikeWhile the Fed has given few if any hints of when  the first rise in their key funds rate will be, the Consumer Discretionary Sector ($XLY) appears traders think it’s already started.

XLY

For the bulk of the bull market off the March 2009 low, the relative performance between the Discretionary Sector and the overall market has been in an uptrend. This relationship then changed at the start of 2014 as XLY began to falter relative to the S&P 500. We’ve also seen a bearish divergence develop on the weekly chart as the Relative Strength Index (RSI) puts in series of lower lows. This weakening of momentum does not bode well the Consumer Discretionary sector and may lead traders to begin applying pressure to prices.

Are traders too early in their positions against the Discretionary Sector or is this just another clue that a rate hike may not be too far in in the distant future?

Source:  Sector Performance During Rate Tightening Cycles (The Reformed Broker)

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Weekly Technical Market Outlook 9/8/2014

It has been a couple of weeks since I’ve written a Technical Market Outlook, so it’s good to get back to updating these charts again. Last week the S&P 500 ($SPX) finished 0.22% higher, the Russell 2000 ($IWM) ended the week down 0.15%, and Emerging Markets ($EEM) had a strong finish, closing out on Friday up 1.75%.

Trend

As the S&P 500 continues to head higher and hit new highs, the trend is of course still positive. We remain above both the 20-day and 100-day Moving Averages as well as the long-term trend line.

trendMomentum

As the equity market has been strong over the last couple of weeks, we have seen momentum apparently hit some headwinds. A small divergence has developed in the Relative Strength Index as well as the MACD indicators on the daily time frame. While the momentum indicators have not begun turning lower, they have also not confirmed the new highs seen in price.

Momentum

Treasury Yield

On July 10th I tweeted the below chart showing the divergence that was taking place between the 10-year Treasury Yield and the ratio between the U.S. Dollar and Emerging Market Currency Bonds. Jeff Gundlach once said that he watches the relationship between the U.S. dollar and emerging market’s as a leading indicator for the direction of U.S. Treasury yields. Back in July the ratio between the Dollar and Currency Bonds was heading lower, which ultimately followed by the continued drop in the 10-year Yield to.

Now we are seeing the correlation between the 10-year Yield ($TNX) and the ratio once again break down as the dollar strengthens against Emerging Market Currency Bonds with $TNX not responding in-kind. While the 10-Year Treasury Yield has found support at the 100-day Moving Average, I’ll be watching to see if it begins to react to the rise in the dollar against emerging market currency’s or if this divergence becomes more severe.

usd emerging bonds

Breadth

Like momentum, we have a slight divergence in the NYSE Common Stock-Only Advance-Decline Line, which has yet to take out its previous high. However, I will note that the S&P 500 ($SPY) Advance-Decline Line (not shown) has confirmed the new high. We are also not seeing much strength in the Percentage of Stocks Above Their 200-Day Moving Averages, as the indicator remains under 70%.

Breadth

60-Minute S&P 500

Looking at the intraday price action of the S&P 500 ($SPX) the strength in price does not appear to be being confirmed in the RSI or MACD momentum indicators. We last saw an example of this in Late July which led to price dropping a couple of percent and eventually creating a bullish divergence in momentum and sending price right back and to a new high. 1990 has acted as support recently, so that’s the level I’ll be watching if price does weaken this week. If we can’t hold on to that then price may see some more selling.

60 min

Small Caps

Dana Lyons has become one of my favorite follows on Twitter and Tumblr accounts to follow. Dana produces some really interesting research and is someone definitely worth a follow. Last week Dana wrote an interesting post looking at the duration of the divergence between small and large cap indices. While this topic of lack of confirmation in small caps has gotten discussed quite a bit this year, the length of time of the divergence, based on the work done by Lyons’, actually doesn’t lend itself to a complete bearish argument. Dana writes that  the “Long-duration S&P 500-Russell 2000 divergences have not led to the calamitous types of events one often hears warnings about. 10 of the 11 such historical precedents have led to only moderate hiccups in the market. The two most similar to our present divergence, however, have had split results, including a bear market.”

The chart below shows the previous examples of previous 100+ day divergences between small and large caps while the large caps were making new 52-week highs.

Small cap divergence

Last Week Sector Performance

Once again, Utilities ($XLU) lead the way last week, followed by Consumer Staples ($XLP) and Financials ($XLF). The Energy ($XLE) sector was the big under-performer for the week, followed by Materials ($XLB) and Technology ($XLK).

sector week

Sector Performance Year-to-Date

While Utilities had faulted a couple of weeks ago, it has moved back to being the best performing sector YTD as it just barely beats out Health Care ($XLV). Consumer Discretionary ($XLY) and Industrials ($XLI) round out the bottom of the pack.

sector YTD

Source:  Is the duration of the small cap divergence a concern? (Dana Lyons)

 
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.