Emerging vs. Domestic Markets

The ratio between the iShares Emerging Market ETF ($EEM) and the SPDRs S&P 500 ($SPY) has produced some interesting setups this year. While $EEM hasn’t been the strongest performer YTD, by applying some methods of technical analysis we are able to get an idea of where strength may or may not show up.

From the peak in relative performance against $SPY last October, Emerging Markets underperformed for the next five and half months. During that time we saw the Relative Strength Index stuck in a bearish range, which supported the down trend in the ratio between $EEM and $SPY. While a positive divergence in RSI began to develop in January, the momentum indicator was unable to break above overhead resistance until late March. The break in momentum resistance also coincided with the break in trend line resistance for the price ratio. $EEM was able to then outpace the S&P 500 for the following month.

Starting in April we can see in the chart below that the ratio between emerging and domestic markets began making lower highs and higher lows. This creates a symmetrical triangle pattern. Oftentimes we see the resolution of this type of pattern to favor the previous trend. But what’s interesting about this particular triangle pattern is that it was formed after a ‘trend’ (if you want to call it that) that lasted just one month. is that really enough time to obtain the overall bias?

I’ll be watching to see which direction this period of consolidation breaks and whether Emerging Markets or Domestic markets are able to win out in the end.

EEM SPY

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 4/28/2014

Welcome back, I hope everyone had a great weekend. I started my BBQ competition season this past weekend in Mt. Carmel, IL. There were some of the best teams in the country present and we had a lot of fun and finished up 19th out of 50 teams. We closed out last week with four sectors now under their 50-day Moving Averages lead by the selling on Friday. Crude ended the week lower after testing the resistance I mentioned in my Technical Market Outlook post two weeks ago and is now testing the rising trend line off the 2014 lows.Emerging markets ($EEM) have continued to under perform

Equity Trend

While this portion of the Technical Market Update has previously been fairly uneventful we are starting to see the development of a potential trend change. With Friday’s sell-off we may have begun to see the start of a lower low. The selling also happened at the March high which may signal that the pop to a fresh new all-time high in April was more out of exhaustion than resound bullishness. As always, we allow the price to lead the way and would still need to see a break of the April low, as well as the rising trend line that developed during 2013, before the bears takeover the trend. equity trend Equity Breadth

We still have a bullish setup in breadth with the Advance-Decline just coming off a fresh high. The percentage of stocks above their 200-day MA is also in a short-term rising up trend, which is currently close to be testing. equity breadth Equity Momentum

As I have been saying for the last couple of weeks, momentum is one of the uglier charts for equities. While two weeks ago we saw the Relative Strength Index (RSI) hold support as stocks began to rise, a negative divergence is still taking place. The RSI has been making lower lows for the last four months. The same type of divergence is beginning to develop on the weekly chart as well. While the S&P 500 ($SPX) got back to its March high the MACD is barely positive. As we enter the historically bearish 6-months of the year it may be hard for the equity market to buck bearish momentum AND bearish seasonality. equity momentum Coffee

As I noted last week in my brief Technical Market Outlook, I’m keeping a close eye on commodities. I came into this year one of the few bulls for the agriculture space but as all things – once they go up they must come back down. One of the best ag commodities this year has been coffee, up 87%. Since it’s one of the leaders I’m watching it for early signs of deterioration in its trend. Last week we saw coffee ($KC_F) prices break above their March high but to only give those gains partially back on Friday as it fell back under the previous high. This took place with the Relative Strength Index creating a negative divergence of lower highs. Although, price is still in it’s up trend off the previous April lows. If we see a break of $2.00 and the RSI breaks under 50 then we may begin to start seeking lower prices. coffee If we look at the 5-year seasonal trend for coffee we can see that historically a peak has been put in at the start of May. The same type of pattern also occurs on the 10-year and 15-year look back periods as well. KC_5YrStudy 60-Minute S&P 500

The one hour chart of the S&P 500 ($SPX) does a nice job showing the resistance created by the previous March high. The RSI and MACD both have rolled over and bears will be attempting to set their sights on the April low around 1815 as the next target. If we do not see continued selling then bulls need to get to 1900 to keep things in their control. 60 min Sentiment

I always find it interesting to see what the retail investor is doing. While most of the attention seems to get focused on the polls by AAII, Investor Intelligence, and NAAIM, they don’t actually show you what investors are doing. However, the data provided by Rydex funds does. Below is a chart of the total assets held in the bullish funds by Rydex divided by all Rydex assets combined. While the S&P was unable to make a new high, the percentage of assets held in bullish funds did. Retail investors still like stocks and are continuing to push money into the market. sentiment bull percentage Last Week’s Sector Performance

Utilities ($XLU) continued to lead on a relative-performance basis as the strongest sector. With health care ($XLV) and energy ($XLE) also seeing strength. Technology ($XLK) and materials ($XLB) were the weakest performers during trading last week. weekly sector Year-to-Date Sector Performance

With the increase in performance from energy ($XLE) and the continued dominance of utilities ($XLU) I’ve begun seeing people reference the sector rotation chart created by John Murphy over at Stockcharts.com. Murphy shows that historically the strongest sectors at market highs have been materials, energy, staples, and health care, with utilities not far behind. And as you can see, a large chunk of those sectors are what’s been leading in 2014. Utilities continue to lead YTD with energy pushing past health care for the number two spot. YTD sector Major Events This Week

We have a fairly busy week this week as it pertains to economic reports. The main focus will likely be on Wednesday with the GDP data and the FOMC Announcement. Now that Yellen has told us she doesn’t think unemployment is as important as it was to her predecessor, traders are able to breathe a little easier (hopefully) on Friday.

Monday: Pending Home Sales
Tuesday: Case-Shiller Home Price Index
Wednesday: GDP, FOMC Announcement, and Farm Prices
Thursday: Jobless Claims, Auto Sales, and ISM Index
Friday: Non-Farm Payroll and Factory Orders

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.

Did We Just See A False Break in Emerging Markets?

Last Friday I tweeted out this chart that shows the ratio between the iShares Emerging Market ETF ($EEM) and the S&P 500 ($SPY). I noticed that the ratio was approaching previous support as shown by the red arrows and the blue line. This was an important juncture for emerging market bulls, they needed to break this level to keep the music playing.

Well it seems the bears bulled the plug as the ratio between emerging markets and the S&P 500 produced a false break as it made an attempt to keep from turning previous support into resistance. At the same time we saw the relationship’s Relative Strength Index (RSI) work off ‘overbought’ status which is a sign of heavy buying as traders pushed up the relative performance of $EEM against $SPY. Going forward I’ll be watching to see if we get another rest of this resistance or of we see emerging market once again under perform U.S. equities and we get a re-test of the March low.

EEM SPY

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 2/10/2014

This most recent correction, dip or whatever you want to call it fit the pattern we saw during the two drops in 2013. When viewing the S&P 500 ($SPX) on a weekly chart we can see price dip down to the 20-week moving average followed by the next week advancing higher while holding the moving average as support as price eventually heads higher, continuing the predominate trend. This is what we saw take place over the last two weeks, with price holding the 20-week moving average as traders took the price of equities higher. A second highlight last week was the backwardation we were experiencing in volatility ($VIX) corrected itself with the $VIX dropping nearly 30% as traders realized the world did-in-fact not come crashing down.

Equity Trend

The ‘purist’ of the trend following community would view the current price action of the S&P 500 ($SPX) as in a down trend with it having lower lows and lower highs. However, I feel we are still in a trend ‘neutral’ point with Friday’s movement taking us to the first ‘lower high’ at 1800 – potentially putting in a higher high. We closed the week at an interesting point as the S&P tests the trend line (green dotted line) that had acted as support for the bulk of 2013. If this trend line becomes resistance and the 100-day moving average (blue line) is once again threatened then the equity bulls may be in some trouble.

S&P 500 TrendCommodities

While not a big fan of making predictions, in Phil Pearlman’s Yahoo! Finance article in December I said “Typically we see the most hated areas of the market one year rotate back to strength the following year. I’ll be watching to see if this happens for the commodities market in 2014.” While the year is still young, this is exactly what appears to be happening as commodities are leading in relative performance against equities.

Looking at a current chart of the Commodities Tracking Index ETF ($DBC) we are at a potentially make-or-break point. Trading finished out last week butting up against the 100-day moving average, which stopped commodity bulls in their tracks in December. Price is also at the falling trend line off the August and December 2013 highs. If $DBC can break these two levels of resistance and power through the 200-day moving average then we would have ‘open air’ so to speak, with little resistance to stand in the way of price continuing its up trend until we get to the August ’13 high.

CommodityEquity Breadth

In last week’s Technical Market Outlook I said that while equity prices were back at December levels, we were not seeing the same action in the Advance-Decline Line; with this measure of breadth holding up rather well among the selling pressure. The Percentage of Stocks Above Their 200-day Moving Average indicator also was able to break back above its trend line support as more stocks began to move higher.

Equity BreadthEquity Momentum

My favorite measure of momentum, the Relative Strength Index (RSI), was able to hold support last week as it finished out trading testing the 50 level. Neither of the two oscillator momentum indicators (RSI and Money Flow Index) reached ‘oversold’ conditions during selling pressure, which is a bullish sign that bulls are likely still in control. We’ll see if this continues in trading this week.

Equity momentumEmerging Markets

Last week I wrote a post “Early Signs of Bullishness for Emerging Markets” and showed a chart of the relative performance of $EEM against $SPY. Emerging market equities have begun to gain ground against their domestic counterparts which comes at an interesting time….

The chart below is from Morgan Stanley (courtesy of Business Insider) and shows the in and out flows from emerging market funds. Apparently two weeks ago was the last bit of weakness emerging market traders could take, as they sent weekly flows lower by the 5th largest move in history. This is exactly what contrarian traders want to see as it shows a potential sign of blood in the streets.EEM flows60-Minute S&P 500

The short-term view of the S&P 500 ($SPX) gave us an interesting viewpoint last week. First lets look at the price action. We saw selling into the 1740 level, followed by a small bounce before selling headed back to 1740 where price gave a false break of the previous low, with the next candle testing 1740 as buyers began stepping back. This was our first sign that price may begin to head higher. The S&P finished the week testing resistance 1800. Looking at momentum, specifically the MACD indicator (bottom panel), we can see a positive divergence was forming as it put in a higher low while price made a lower low. Finally we have the Relative Strength Index which got pushed above 70 into ‘overbought’ territory – a bullish sign going into trading this week.

60 minLast Week’s Sector Performance

Once again, the utilities sector ($XLU) was the best relative performer last week, followed by health care ($XLV) and materials ($XLB). Consumer staples ($XLP) and technology ($XLK) held up the rear.

Week sector perfYear-to-Date Sector Performance

Not much change has occurred in the YTD sector performance with utilities ($XLU) continuing to lead the pack with health care ($XLV) and technology ($XLK) coming in second and third.

YTD Sector PerfMajor Events This Week

This week is a light week for economic reports. The highlight will likely be Janet Yellen’s first testimony as Fed Chair before Congress.

Monday: None
Tuesday: Janet Yellen testifies before Congress
Wednesday: None
Thursday: Retail Sales and Jobless Claims
Friday: Industrial Production

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.

Early Signs of Bullishness for Emerging Markets

Emerging markets have just been getting destroyed over the last several months, with the iShares Emerging Markets ETF ($EEM) down nearly 9% year-to-date alone. While everyone appears to be turning bearish on this portion of the market, it seems the underlying internals may be giving us some clues to a shift in trend.

Below is a chart of the ratio between emerging markets ($EEM) and the S&P 500 ($SPY). The green line has been taking the elevator down since October as U.S. equities have been outperforming emerging stocks. However, since November we’ve seen the Relative Strength Index (RSI) begin to rise and create a positive divergence by making higher lows and higher highs.

Over the last couple of days the relative performance of $EEM began to gain some ground against $SPY as it breaks its falling trend line. What emerging market bulls would like to see happen is have the most recent high in the ratio from January get taken out to help confirm the potential trend change. We also have the RSI indicator testing resistance as it attempts to break out and confirm what’s taking place in the ratio.

EEM SPYThe trend in emerging markets is firmly negative and just a few days of positive relative gains are unlikely to be enough to see money start barreling back into this depressed market. Although I think the above chart is constructive and is something I’ll be watching going forward – specifically if the ratio can take out its January high. But if we see things shift and the ratio falls back under the trend line and takes out the February low then the above chart will be invalidated and the weakness in emerging markets will likely continue. We’ll see what happens.
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.