Can The Russell 2000 Continue to Lead the S&P 500?

Since mid-January Large Cap stocks (i.e. the S&P 500) have been nipping at the heels of Small Cap Stocks (i.e. Russell 2000). In 2014 many traders and market commentators pointed to the major under-performance as a big concern for the market as a whole. But it seems that notion as been left in the rear view mirror as stocks have continued to march higher and small caps ($IWM) have improved. The conversation has now shifted from “look how bad they are doing!” to “look how much stronger they are!” Oh how things change.

I often focus on price charts below is a chart of the Advance-Decline Line for the S&P 500 (top panel in black) and the S&P Small Cap Index (bottom panel in Green). While breadth for the S&P 500 has been rising right along with price, lately it has begun to put in a set of lower highs. While this is occurring the Small Cap A-D Line has been setting new highs, keeping its up trend alive. I’m not using this chart to make a market call, but to simply point out an interesting development taking place.

A-D Line small and large
So is this occurring because it’s historically a strong time period for small cap stocks? Actually no. April is one of the worst months for out-performance by $IWM over $SPY. Since 2007, as this next chart show, $IWM has only outpaced it’s larger cap counterpart 22% of the time (2009 and 2010).

IWM SPY

If the Russell 2000 can keep its party alive and continue to lead the S&P 500 during one of its historically weakest periods of time then that would be a pretty big achievement in my eyes and one that would be tough to ignore. So far $IWM has begun to lag $SPY during the first week of trading in April, starting the Russell 2000 in a hole for it to dig out of. Will it be able to do it? We’ll see.
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 Germany Help Lead International Markets Higher?

With the start of 2015 we have begun to see movement in international markets after the focus has been squarely on U.S. equities over the last two years. After the first few weeks of January, international markets have put in a stint of outperformance relative to U.S. indices. When this begins to happen I like to find some of the stronger markets among the international group. To do this we can use the Relative Rotation Graph (RRG) which measures the relative performance of a set of ticker symbols relative to the S&P 500 ($SPY) while also measuring the momentum of that relative performance.

Read the rest over at See It Market
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 12/1/2014

It’s been a few weeks since I’ve done a Technical Market Outlook post, but I’m back and ready to run through some charts.

We’ve seen the U.S. equity market continue to grind higher, being led by large caps ($SPY) with Small Caps ($IWM) under-performing over the last couple of weeks. Bond traders have still shown a lack of interest in risky assets, and international markets have remained in the shadow of the S&P 500, all while commodities have disappointed. Spot gasoline prices took a fall on Friday, dropping 9% and Crude Oil fell even harder, down over 10% for the day.

Trend
As the S&P 500 ($SPX) continues to hit new highs, the up trend remains in tact. We also have the 20-day and the 100-day Moving Averages upward slopping which is a good sign for equity bulls.

TrendBreadth
In my opinion, breadth is currently a mixed bag. The chart below shows the NYSE Common-Stock Only Advance-Decline Line, which has broken above its falling trend line but has yet to make a higher high and confirm the rise in the equity market. We also have the down trend in the Percentage of Stocks Above Their 200-day Moving Average. However, the Advance-Decline Line for the NYSE has hit a new high, which was helped by its inclusion of some bond funds. The S&P 500 and the Nasdaq Advance-Decline Lines have also confirmed their respective index’s move.

With three of the four major A-D lines hitting new highs, this is likely to be viewed by most in a positive light. While I had been cautious of the advance due to a lack of breadth confirmation, the measurements mentioned above have eased the bulk of my concerns.

breadthBreadth Part Two
On October 15th, just as the S&P 500 was finding a bottom I wrote a post called “We Haven’t Seen A Market Top Yet.” In that post I showed the following chart, which has a unique measure of market breadth. The blue line on the chart measures the S&P 500 components relative to their respective 52-week high and low. Rather looking at just whether stocks are rising or falling like the Advance-Decline Line; this indicator is more concerned with where the stocks are relative to their prior moves which can give us a better idea of market internals to some degree.

In my October post I wrote that in 2007 we saw much more deterioration in this breadth measurement compared to where we were at the September ’14 high. I wanted to see if the divergence widened when the market rose and tested or made a new high. Well now that this has happened I wanted to check back in with this breadth indicator. Unlike in 2007, more S&P 500 components have gotten closer to their respective 52 week highs. We are currently testing the September level and the indicator is back in a health range, well above were we were at the ’07 peak.

While there are still signs that things maybe extended, I do not believe we are currently seeing the same level of corrosion in breadth like we were in prior market tops.

relative to 52wk

Momentum
The divergence in the Relative Strength Index that sent up a warning flag in September is no longer present as the momentum indicator has once again broken above 70, and is now giving an ‘overbought’ reading. As a reminder, being ‘overbought’ while can lead to short-term weakness is a longer-term positive as it shows strength within a market.

The MACD has also cleared out its divergence, however one piece of the MACD that does have me concerned about the short-term is the histogram. Like in March and August/September of this year, the histogram has been diverging from price and is almost negative. The Histogram of the MACD indicator is simply the difference between the ‘fast’ and ‘slow’ lines represented. This type of divergence often gives an early warning to a crossover of the MACD lines, which is bearish for price.

momentum

Energy Sector
The slide in the Energy Sector ($XLE) has been picking up steam, down nearly 8.5% year-to-date. Back in July when it seemed like everyone loved the energy space and thought $XLE could do no wrong, I wrote about whether the sector was due for a pullback. The RSI indicator was at its highest level ever, price was the furthest above its 200-day Moving Average since the 2011 and 2008 peaks, and price was testing a long-term level of potential resistance. That day ended up marking the peak for $XLE and it hasn’t looked back since.

Now, we have another interesting chart for the energy space, this time relative to the S&P 500. Below is a monthly ratio chart of $XLE and $SPY. Since the inception of these two ETFs we have never seen the Relative Strength Index (RSI) fall below 30, until now. Momentum has just been getting pounded as the U.S. equity market rises and energy gets destroyed. Looking at the prior lows in 1999, 2000, and 2003 we can draw a trend line that may act as support if we see the relative performance between these two continue to favor $SPY.

xle spy60-Minute S&P 500
It’s been interesting to watch the intraday movement of the S&P 500 since the prior low. Price has been able to hold above the 50-1 hour Moving Average since it last crossed above it in October. The Relative Strength Index (RSI) has also done a great job at holding support near the 50 level, which is where we find it after the close on Friday. The MACD has been declining for the bulk of the advance. I would not call this a divergence since the decline does not include any significant swings in price for the S&P. I’ll be watching to see if the RSI continues to hold support and if price also remains above its Moving Average.

60 minYield Curve
As I’ve discussed multiple times, the bond market is either disconnected from equities or is not feeling the same level of jubilance as stock traders. The yield curve does a good job at depicting this. Over the last 25 weeks, the Rate of Change for the bond curve is down nearly 22%, a level we haven’t seen since the 2011/2012 lows. A declining yield curve can be trouble for the financial sector. While financials have not been a star performer this year, they have been able to outpace the broader index YTD. The yield curve is likely on everyone’s radar and the repeated drumbeat of new lows is becoming hard to ignore.

yield curveSector Relative Rotation Graph
Below is the RRG for the nine S&P sectors. This graphic shows the trend in performance as well as the momentum of that trend for the sectors relative to the S&P 500, for more information go here. In the current depiction of the RRG we can see the strength in Utilities ($XLU) and Consumer Staples ($XLP). While Health Care ($XLV) has been a leader this year, it has begun to see its trend momentum weaken as it nears the ‘Lagging’ category. The Financial ($XLF), Consumer Discretionary ($XLY), and Material ($XLB) sectors are also experiencing weakened trend momentum.

sectors rrgLast Week’s Sector Performance
While it was a shortened week with no doubt lower volume due to the Thanksgiving holiday, we still had some trading days to look back at. For the week, Consumer Discretionary and Technology led the way relative to the S&P 500. With Energy of course being the worst performing sector followed by Materials.

last week sectorYear-to-Date Sector Performance
Looking at the last 11 months of 2014 the sector leaders have rarely changed. Health Care is back in the top spot followed closely by Utilities and Technology. Energy holds the up the rear along with Materials, Consumer Discretionary, and Industrials as the four sectors still under-performing the market YTD.

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.