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.

Will Small Caps Continue To Weaken?

Understanding where weakness and strength are coming from is often a critical component in analyzing the stock market. Right now it looks like Small Caps are one of the ugliest pigs in the pin. On its face value, the Russell 2000 iShares ETF ($IWM), looks fine:  It’s near its all-time high, in a clear up trend and above its major moving averages. It’s when we look under the hood of the car that we can see what’s going on with the Small Caps.

The chart I’ll be talking about today is a weekly chart $IWM going back to 2007.

I’m going this far back to show past examples and compare them to today of when Small Caps have come under fire. Looking at the peak in 2007 we can see that $IWM created a double top at $77.50, very similar to what happened in 2011 and the current price action.

In this piece I continue to discuss the other similarities between the 2007 and 2011 high compared to the current price action.

To see the chart and to keep reading: Will Small Caps Continue To Weaken? (See It Market)

Weekly Technical Market Outlook 6/2/2014

The S&P 500 finished higher by 1.21%, Small Caps ($IWM) finished up 0.79% and International stocks ($EFA) closed out the week up 1.00%. Even though we got a negative GDP print, it seems traders are little concerned about any potential macro weaknesses in the economy and just want to see higher equity prices. SentimenTrader wrote an interesting point on Friday with the S&P closing out the month of May at a new one-year high, “since 1928, it has managed to do so 7 times. The first week of June showed a positive return only 1 time, and the entire month of June was positive 2 of the 7 times. The years were 1944, 1950, 1959, 1963, 1990, 1995, and 2007.”

Trend

As we continue to hit new highs the trend in the S&P 500 ($SPX) is of course up. We remain above our short-term and intermediate-term moving averages, the 20-day and 100-day MAs as well as the rising trend line off the previous lows.

TrendEquity Breadth

We saw a fair amount of positive movement in breadth last week, with the Common Stock-Only Advance-Decline Line hitting a new high, confirming the move that’s taken place in the underlying index. The Percentage of Stocks Above Their 200-Day MA has also come off its low and is attempting to set a higher high above its previous May high of 72.5%.

BreadthThe net number of new highs vs. new lows, a chart I’ve discussed a handful of times this year as a sign of weakening breadth has also shown signs of improvement. This 5-day total measure of breadth has broken its down trend of lower highs since its peak last October. This is a move in the right direction for the market to begin seeing some health internals for the current aging bull market.

new highs lowsEquity Momentum

For the bulk of 2014 I’ve been discussing the negative divergence that’s been happening in both the Relative Strength Index and the MACD. Last week we saw the RSI break above the falling trend line after holding on to the 50 level. While the MACD is still making lower highs, it is rising and may try to play catch up this week or next.

Momentum

Crude Oil

Last Thursday I wrote a post about the relative performance between Crude Oil ($CL_F) and Gold ($GC_F). Today I want to look at just Crude Oil. Since March the $105 level has been resistance, and is just about where price finished up on Friday. With each attempt to break $105 in oil we’ve seen a lower a negative divergence develop in the Relative Strength Index. Prior to the Sept ’13 peak and the January ’14 low, divergence in momentum were taking place. I’ll be watching the rising trend line off January and May lows and if that eventually gets broken as we progress into the summer.

Crude Oil

 Bonds

On Friday we saw the 10-Year Treasury Yield ($TNX) hold on to its October ’13 low as well as its 200-week Moving Average. Below is an interesting chart from Bianco Research of the current 30-Year Treasury YTD performance compared to past years. As you can see, since 1974, the best year for 30-Year Treasury’s was 2008. While many traders and pundits are saying that bonds have run too far too fast while equities slowly craw to new highs, a few basis points at a time. However as the chart below shows, we saw much stronger bullish action in 1986 and 1995 by this point in the year, and both instances saw bonds continue to gain into year-end. While bond yields may be sitting at support right now, the historical context shows that it’s POSSIBLE for bonds to continue to rally, we’ll see if they do.

bond market rally Bianco

60-Minute S&P 500

The S&P has continued to make higher highs as the index rides above its 50-1hr Moving Average. The RSI indicator has been staying right around the 70 level, a sign that bulls are firming in control on this intraday chart. However, we do have a slight negative divergence in the MACD indicator in the third panel of the chart below.

60min spxLast Week’s Sector Performance

After a few weeks of under-performance, Utilities ($XLU) came back last week as the best relative performance sector. Utilities was followed by Consumer Staples ($XLP) and Health Care ($XLV).

weekly sector perfYear-to-Date Sector Performance

With last week’s strength Utilities continue to be the strongest sector YTD with Health Care and Energy ($XLE) are nearly tied for second place. Consumer Discretionary ($XLY), Financial ($XLF), and Industrials ($XLI) are the only sectors still unable to keep up with the S&P 500 so far this year.

YTD sector perf
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.