You think we’ll hear much about Russia this week? Probably. The great aspect of using technical analysis is we don’t need to immerse ourselves in the headlines or know the intimate details of when country is currently invading another country. If the market feels this information is important than it will show up in the price action. It can be easy to get caught up in flashing “breaking news” events and attempting to dissect the impact it will have on price movement. While the situation in Ukraine is important and will affect hundreds of thousands if not millions of lives, we must categorize that in a different part of our thought process and allow our chosen strategy or lens to lead our bias.
Little needs to be said about the current trend of the equity market. It’s still positive as we hit new highs last week in the S&P 500 ($SPX).
We had a good week in market breadth last week with the Advance-Decline line continuing to head higher. While we saw some consolidation and an eventual new high in the S&P, the Advance-Decline Line, which measures the number of NYSE stocks heading higher vs. those in the red, has almost gone in a straight line up. As expected, the Percentage of Stocks Above their 200-day Moving Average has broken out of its multi-month range as it tries to kiss 75%. However, there is one measure of breadth that is still concerning….
Below is a chart of net number of stocks making new highs vs. new lows and then taking a 5-day total to show what’s taken place in a single trading week.This chart shows the last 11 years and I’ve drawn trend lines on the breadth measure to show negative divergences. In 2005 and 2006 we saw the net numbers of new highs and new lows kept hitting resistance while price advanced. This lead to breadth making lower highs, diverging from price before a top was set in 2007. We also had a notable divergence of lower highs going into the short bear market in 2011. Last year with the equity market challenging 30% gains, the new highs-lows indicator mimicked the action in ’05/’06 – hitting resistance. However towards the end of 2013 and into the first two months of ’14 we have begun seeing lower highs once again.
While the previously mentioned measures of breadth are showing signs of confirmation for the new high in the S&P, this measure is not. Is this a sign of future weakness to come in to the market? Maybe. Although its hard to make that argument with the Advance-Decline line showing such strength, which it was not doing going into the 2007 high.
The two more traditional forms of momentum, The Relative Strength Index (RSI), and the MACD, are both not confirming new highs. However, the RSI indicator is still rising and could be just ‘late to the party’ before reach ‘overbought’ status and showing confirmation. The Money Flow Index, which incorporates volume into the momentum calculation has reached an ‘overbought’ status, something we haven’t seen since last October.
To keep with the theme of divergences, I want to take a moment and look at the bond market. Below is a chart of the S&P 500 ($SPX) with the ratio between the High Yield Corporate Bond ETF ($HYG) and 20+ Year Treasury ETF ($TLT) in the second panel and the 10-year Treasury Yield ($TNX) in the bottom panel.
It’s often said that the smartest traders are in the bond pits. This may be why we look to bonds to confirm what may be taking place in the equity markets. If the smartest guys (or gals) on The Street are bond traders, then they aren’t showing the same level of excitement as equity traders right now.
One way to measure ‘risk appetite’ is by looking at the relative performance of high yield debt compared to safe-haven Treasury bonds. When this ratio (green line) is rising we know that traders are showing a bias towards high yield bonds which means risk-taking is still in vogue. We also want to see the 10-year yield move with the equity market to help confirm an advance. Right now, neither of these are occurring. It appears bond traders are showing more signs of concern than what’s taking place in equity price action, which raises a yellow flag for the new high we hit last week. Treasury bonds are being favored over high yield and the 10-year yield has been heading lower – both measures diverging from recent equity price action.
60-minute S&P 500
As I mentioned last week, the 50-1hr Moving Average would likely be a good place to look for support on any dips. The divergence that was taking place in the Relative Strength Index was able to be worked off as the RSI indicator broke above 70 with the S&P hitting a new all-time high. The MACD is still showing a divergence on the short-term view, refusing to cooperate with the bulls. I’m writing this on Sunday night and if the futures market is giving us any indication to how trading will be today (Monday), we’ll be cutting right through previous support like a hot knife in butter.
Last Week’s Sector Performance
Two weeks ago the strongest sectors were health care ($XLV), utilities ($XLU), and energy ($XLE), all of which showed relative weakness during trading last week. The materials sector ($XLB) was the strongest sector last week, with consumer discretionary (cyclicals) ($XLY) and consumer staples ($XLP) rounding out the top three.
For the first time in 2014, healthcare ($XLV) has pushed its way to the top spot in sector performance, showing a repeat of 2013. Utilities ($XLU) still appears to be a trader favorite as it is the second strongest sector YTD. Consumer staples ($XLP) continues to stray from the pack of low beta sectors, as its the worst relative performer in 2014.
Major Events This Week
While Russia invading Ukraine will likely hold as the major headline this week, as we approach Friday the focus will shift to the Non-Farm Payroll report.
Monday: ISM Manufacturing Index and Construction Spending
Wednesday: Beige Book
Thursday: Jobless Claims and Factory Orders
Friday: Non-Farm Payroll
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.