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.

Weekly Technical Market Outlook 2/3/2014

While the bulls crushed it for what feels like every trading session in 2013, they weren’t able to hold strong to start off 2014. For the S&P 500, January finished down 3.56%, the Dow  finished the month 5.6% lower, Nasdaq was down 1.74%, and small caps dropped 2.77%. Last week I wrote a post about the important level in equities to be watching right now as it pertains to historical returns. The Dow closed out trading on Friday just barely under the support level I highlighted. We’ll see if things continue to weaken this year or if buyers are able to step up and continue to defend support.

Equity Trend

Last week we broke through the 12-month trend line but traders then began keeping the price of the S&P 500 ($SPX) in a fairly tight consolidation above the 100-day moving average (blue line). Price for equities sits just at the previous December low as a break of the 100-MA would trigger a lower low and be a potential trend change. However, as I’ll discuss later, I think sentiment towards stocks has shifted too far too fast in order to see continued strength in selling. But we’ll see.

equity trendEquity and Treasury Relationship

The green line in the chart below shows the relative performance between the S&P 500 ($SPX) and 10-year Treasury bonds ($UST). As the line rises, we know that stocks are outpacing bonds and visa versa when the line heads lower. Late last year the ratio between these two asset classes finally broke above its 2007 high, which while it may seem interesting, isn’t what’s important about this chart.

What’s important is when this relationship begins to diverge from the price of equities. This has happened twice in the last seven years – at the 2007 and 2011 highs. In 2007 we had stocks begin to under perform Treasury’s while the S&P continued to hit a new high. In ’11 we did not see a lower high in the ratio between $SPX and $UST but it did not confirm the move that was taking place in $SPX alone. As the chart shows, both instances lead to lower prices in the stock market, albeit at a different severity.

As the green line drops back below the 2007 high, what I’ll be watching closely on the weekly chart is if buyers come back into the equity market and test (or break) the previous high in price but of the stock-bond relationship does not provide confirmation then if history is any indication – we may be in trouble. However, we may very well see a confirmation of a tested or new high – we’ll let price lead the way.

S&P vs treasuryEquity Breadth

Like price, we saw breadth begin to consolidate after the sharp drop. The Advance-Decline Line is still in an uptrend as it has yet to break below it’s December low. The Percentage of Stocks Above Their 200-Day Moving Averages, while weak, is still above its rising trend line. If we get continued selling this week then there’s a chance we see the Percentage of Stocks Above 200-MA test or break the trend line which will likely be a large chink in the armor of the (so far) bullish outlook in equity breadth.

equity breadthEquity Momentum

In last week’s Technical Market Outlook I noted the importance of the Relative Strength Index (RSI) holding above previous support as it maintains its bullish range. While price consolidated we did see the RSI indicator hold above 35. The MACD momentum indicator continued to weaken last week putting in a lower low. The Money Flow Indicator held up well as it continues to stay above its December low – a sign that selling volume may not have been all that strong last week.equity momentumSentiment

CNN has created an interesting tool to measure sentiment, they call it their Fear & Greed indicator. The measure takes into account stock price strength (# of 52 week highs), breadth (McClellan Summation Index), demand for junk bonds (spread between investment grade and junk), momentum (% above 125-day MA), option activity (put/call ratio), volatility ($VIX above or below 50-MA), and safe haven demand (stocks vs. bonds). Of these seven measurements, 5 of them are registering “extreme fear” according to the analysis by CNN; with the first two showing “fear”.

The chart below shows the composite of the seven indicators, and s you can see we are currently near historical lows in sentiment.

CNN fear and greedS&P 500 60-Minute

The short-term view of the S&P 500 ($SPX) shows some positive divergences in both the RSI and MACD indicators. As price sits in a tight range, both momentum indicators began to make higher lows  which gives us a clue that the directional pull by momentum may lead to higher prices in the equity market. I’ll be watching resistance at 1800 if bulls take control with 1770 being the level of support to keep the long-term up trend intact.

60 min S&PLast Week’s Sector Performance

Once again utilities ($XLU) showed the strongest performance of the nine S&P sectors. While being the second-strongest sector the previous week, consumer staples ($XLP) took it on the chin last week being the weakest performer.

week sector perfYear-to-Date Sector Performance

We didn’t see much change from last week’s Technical Market Outlook for the YTD sector performance. Like the weekly chart above, utilities ($XLU) continue to lead for 2014 with consumer discretionary (cyclicals) ($XLY) holding up the rear as the weakest S&P sector.

YTD sector perfMajor Events This Week

As with most first week’s of the month, the focus will be on Friday’s payroll data. Specifically traders will likely be interested in whether the labor participation rate continued to drop in January and its impact on the overall unemployment rate.

Monday: Motor Vehicle Sales, Construction Spending, and the ISM Manufacturing Index
Tuesday: Factory Orders
Wednesday: ISM Non-Manufacturing Index
Thursday: Jobless Claims
Friday: Non-Farm Payroll Report

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.