Stalking the Elusive Holiday Consumer with Technical Analysis

Hello Fellow ChartWatchers!

I'm going to start with four important announcements and then we'll get into some sector-oriented market analysis:

  • We now have the video of our ChartCon conference from back in August available in our bookstore.  It contains all of the main presentations from the conference including talks by John Murphy, Martin Pring, Alexander Elder, Arthur Hill and many more.  The material presented is just as relevant today as it was back in August.  If you attended the conference, this is a great way to refresh your memories of what you witnessed.  If you were not able to attend, this is your chance!  You can now watch all of these presentations at your leisure on your computer.  Click here to learn more about all of the great sessions that we captured on video and how you can get your own copy.
  • Speaking of great video content, have you attended any of our webinars yet?  Each week we are hosting a "mini-ChartCon" if you like with Greg Schnell (and other assorted guests) giving their thoughts on the market LIVE each Thursday after the markets close.  This past week, Greg teamed up with Martin Pring for a live review of the US markets as well as Martin's thoughts on where things are headed.  They then took questions from the audience for about 20 minutes before wrapping up.  Click here to see a recording of the webinar and make plans to attended our next webinar this coming Thursday!
  • Also, Alexander Elder's new book is out and it is full of charts!  Alex has completely updated "Trading for a Living" with new content, new examples and (of course) new charts.  I am thrilled that we were able to help him create this amazing new version of his timeless classis.  Check it out when you have some time.  It is a "must have" book.
  • Finally, a quick reminder to always try to spend some time each week reviewing the charts in our Public ChartList area.  The authors of these lists - StockCharts users just like yourself - work very hard to update and maintain their charts for everyone to see.  All they ask in return is for people to visit (and then pledge their undying loyalty by "voting" and "following").  With all of the other commentary on StockCharts these days, it is easy to overlook the Public ChartList area so please take a moment and check it out.  Thanks!

OK, on with the show...

Stalking the Elusive Holiday Consumer with Technical Analysis

I've talked extensively in the past about Sector Rotation and doing sector analysis using the nine S&P Sector ETFs.  We have many tools here at StockCharts that can help you see how the nine sectors that make up the US stock market are doing relative to each other and relative to the market as a whole.  Today, I want to show how ratio symbols can be used to determine how bullish or bearish consumers are feeling heading into the upcoming holiday shopping season and what the implications of that battle are for the economy as a whole.

(Click on the chart for a live version.)

This chart shows the relative strength line for the Consumer Discretionary sector vs. the Consumer Staples sector.

The Consumer Discretionary sector (also called the "Cyclicals" sector) consists of companies that sell goods that consumers tend to buy only when they are bullish on the future.  These are items that consumers are able to put off buying in difficult economic times.  Industries within the Cyclicals sector include Gambling, Furniture, Durable Household Goods (e.g., appliances), Travel & Leisure products, etc.  "By definition," the Cyclicals sector out-performs the rest of the market at the start of a new wave of economic optimism and remains relatively strong until that optimism wanes.

The Consumer Staples sector is essentially the "evil twin" of the Cyclicals sector.  It consists of companies that sell goods that consumers will buy regardless of their opinion on the economy.  Industries within the Staples sector include Food, Pharmaceuticals, Non-Durable Household Goods (e.g., cleaning suppies, batteries, etc.) as well as (somewhat sadly) various forms of booze.

Because these two sectors ourperform the market at opposite ends of the economic cycle, looking at the ratio of their corresponding ETFs (i.e., the black line on the top of the chart above) can be very enlightening.  To chart the ratio of two symbols, you use a ticker symbol consisting of the first symbol followed by the colon character (":") and then the second symbol - just like I did in the chart above.  The XLY:XLP ratio gives us a very good indication of how consumers feel about the economy based on how they are voting with their pocketbooks.  If they are optimistic, this ratio will move higher.  If they are cautious, the ratio will move lower.

Notice that since the crash back in late 2008, that ratio line has generally been moving higher.  Looking closer however, a case could be made that things moved sideways between 2011 and the start of 2013, followed by a big move up that lasted until February of this year (more on that in a moment).  I added the yellow Bollinger Bands to the ratio chart to give you a sense of how volatile the ratio's movements can be.  Below this weekly chart, I also added a MACD indicator to help understand the momentum of these movements and see if there is any increase or weakening in the currrent trend.

Now, let's look more closely at things since February:

(Click on the chart for a live version.)

The key things to look for on this chart are divergences - places where one line is generally moving in one direction when the other line is generally moving in the opposite direction.  There are two significant divergences on this chart - do you see them?

The first one happened in March - the ratio (i.e., consumer optimism) moved significantly lower while the S&P 500 (the red candles) moved sideway to slightly higher.  What could have caused this?  Well, if you remember, the end of February was the time when the fighting in the Crimea and, later, eastern Ukraine began.  Clearly those events spooked consumers more than they did the markets.  By May however, consumers had lost interest and their mood began to improve again as evidenced by the rising ratio line on the chart.

The next significant divergence started in mid-October and is still going on.  The S&P has made some tremendous gains while the XLY:XLP ratio has gone sideways/lower.  The exact cause of this divergence is not completely clear (low oil prices are probably playing a part in it) however; as technicians, we are not that interested in "Why?"  Instead, we are interested in "How can I take advantage of this?"  Based on the charts, things probably cannot continue diverging like this much longer.  Either consumers will perk up and the ratio will start moving higher again or the stock market will fall back to earth when it realizes that consumers aren't interested in spending during the holidays.

Which will it be?  Those recent doji candlesticks at the right edge of the S&P chart signal indecision on the part on the market and don't bode well for the near term.  The MACD Histogram of $SPX (not shown, click here) also shows that $SPX is quickly running out of upwards momentum.  So several things point to a decline in $SPX near-term.  The magnitude of that decline may hinge on what the XLY:XLP ratio does in the coming days.  It is worth watching closely.

- Chip


Wal-Mart Jumps to Record High, Retail ETFs Have Benefited From Plunge in Crude Oil

Chart 1 shows Wal Mart surging 4% today to break out to a record high. That's a pleasant change for the world's largest retailer which has hardly been a market leaders. The WMT/SPX relative strength ratio (above chart) is just starting to rise after falling for most of the last year. That's obviously a positive sign for the retail sector as well. Falling oil prices are one of the catalysts behind the recent surge in retailers. But there may be more to it than that. Lower end retailers appear to be getting most of the boost from falling energy costs. In addition to Walmart, that would include stocks like Costco, TJX, and Target. Let's take a look.

The black line in Chart 2 represents the price of Light Crude Oil since the start of the year. The two rising lines represent the two most popular retail ETFs. As a rule, falling oil prices are good for retail stocks because it gives customers more discretionary money to spend. That's been especially true since the middle of June when oil prices started to tumble. Although both retail ETFs have risen since July, the Market Vectors Retail ETF (RTH) has done better than the S&P Retail SPDRs (XRT). Since the start of the July, the RTH (blue line) has risen 13% versus a 5% gain for the XRT. That being the case, I'm going to focus in this message on the RTH. Wal Mart happens to be the largest holding in the RTH (10%).

Earnings Season Delivers

If ever the bulls needed to see some stellar earnings results and/or positive forward guidance, it was about one month ago.  From the late September high of 2019 to the mid-October low of 1821, the S&P 500 fell nearly 10% just as earnings season kicked off.  During the height of earnings season over the past four weeks, the stock market reversed and completely erased all of those pre-earnings season losses and even managed to tack on another 1% or so.

So what areas of the market triggered this bullish reversal?  Well, let me first tell you the two sectors that did not - energy and materials.  The XLE (ETF that tracks energy stocks) remains 10% below where it was in mid-September while the XLB (ETF that tracks basic materials stocks) is approximately 3% lower.  Clearly there's been underperformance in these two sectors.  But there is the potential of good news for both in the near-term.  On the following chart, you'll see that much of the weakness in both sectors can be attributed to a soaring U.S. Dollar index ($USD).  Both energy and materials tend to move opposite the U.S. dollar, especially key metals like gold (GLD).  Take a look at the obvious impact of the recently rising dollar:

Both energy and materials have shown some strength off their recent lows and it could be in anticipation of a reversal in the U.S Dollar index ($USD) to the downside.  On a long-term chart, that would make sense as the U.S. Dollar challenges multi-year price resistance.  Take a look:

That's a quick look at the dollar and the possible implications it might have on energy and materials stocks.  But let's get back to earnings.  Since we've now ruled out both energy and materials as recent sector leaders of the market's rally, where did the strength come from?

Well, over the past month, industrials have posted a 12.10% gain with technology not too far behind with a 10.40% gain.  The strongest industry groups have been transportation stocks ($TRAN), but that makes perfect sense given the drastically reduced crude oil prices.  If the dollar falls, we'll likely see at least a temporary advance in crude oil prices which would have a negative impact on transportation.  Therefore, let's skip that area of the market for now and focus on other strong components for potential short-term opportunities.  Defense ($DJUSDN) is one area of industrials that looks very promising as it recently broke out to fresh new highs, supporting the overall market advance.  Check out the strength below:

If you look at the September high (point A) and the recent high (point B), you'll see that the DJUSDN cleared its prior high by 4-5%, much more than the overall S&P 500.  This is a sign to me that defense stocks are being accumulated and represent an area of the market that we should be interested in and monitoring for solid reward to risk entry points.  In fact, one stock within the DJUSDN just posted earnings that topped Wall Street consensus estimates by 40%, possesses one of the best technical charts around and is literally residing at a key price resistance level -  a level if broken would represent a 10 year closing high.  

I'm featuring this defense stock as my Chart of the Day for Monday, November 17, 2014.  Best of all, my Charts of the Day are now completely FREE as is a webinar this Wednesday evening that discusses the methodology behind  During this session, I'll unveil my strategy of building a StockCharts Watch List of over 200 companies with better-than-expected bottom line results and superior technical strength.  Simply CLICK HERE to register!

Have a great weekend and happy trading!

Tom Bowley
Chief Equity Strategist

After Saying Good Buy, Is The Consumer Cyclicals (XLY) Saying Good Bye?

Consumer Discretionary (XLY) is also referred to as Consumer Cyclicals (XLY) . This is the sector we would like to see break out to new highs. This week it did. Who could be not be bullish?

Every thing I see on the chart looks so good. I saw a pick up in some of the dining stocks, the homebuilders and AMZN within the broaden retailers. It all looks so good. 

Continue reading " After Saying Good Buy, Is The Consumer Cyclicals (XLY) Saying Good Bye?" »

Stock Indices may be Overbought, But They are by No Means Weak

The stock market is in a clear uptrend, but is short-term overbought after a big run the last four weeks. I am assuming that the trend is up because the S&P 500, S&P 500 Equal-Weight Index, Dow Industrials, Dow Transports, Nasdaq 100 and Nasdaq Composite recorded new highs this week. The S&P MidCap 400, Russell 2000 and S&P Small-Cap 600 are lagging, but these three are within 4% of their highs. The PerfChart below shows, however, that small-caps, mid-caps and the Nasdaq 100 have outperformed the S&P 500 since October 14th. Even though small-caps and mid-caps have been lagging for months, they are not exactly dead and they are showing some relative strength over the past month.  

The only problem right now is that the stock market is short-term overbought after a big run. Overbought, however, is a tricky term because stocks can become overbought and remain overbought in strong uptrends. Remember, it takes strong buying pressure to produce overbought conditions and strong buying pressure is bullish. As the PerfChart showed, five of the eight indices are up double digits in less than five weeks. Using the S&P 500 as the market proxy, we can see that the index stalled the last four days with doji forming the last three days. Doji indicate indecision that can sometimes foreshadow a short-term reversal. Even if we get a short-term reversal, I would not expect much downside and would look for support in the 2000 area. Notice that broken resistance and the early November low mark support in the 2000-2020 area. 

Good trading and good weekend!
Arthur Hill CMT

Metal Health

Forgive me! I couldn't resist that cheesy headline stolen from the Quiet Riot album title. The headline is true, metals had a healthy day, as did other natural resource ETFs. I've highlighted notable ETFs right from our DecisionPoint ETF Tracker Report found in the DP Tracker Blog. This displays only a small portion of the ETFs we cover in the Tracker Report and only the section that sorts by the day's percentage change. I've selected four of the charts for analysis.

Continue reading "Metal Health" »

Japan Announces Big Jump in Asset Buying

Japanese authorities surprised everyone on Friday by increasing their already aggressive bond purchases (QE) by a third. In addition, it will expand those purchases to include stocks and real estate investments. The Japanese pension fund also announced that it will increase its allocation to domestic and foreign stocks. That gave a huge boost to global stocks. The most dramatic effect was seen in Japan. Chart 1 shows the Japanese yen tumbling to the lowest level in seven years. At the same time, the Nikkei Index surged nearly 5% to the highest level in seven years. We've pointed out many times before that the falling yen since the end of 2012 has been the main driving force behind Japanese stock gains. That was certainly the case again this week. The monthly bars in Chart 2 show the Nikkei also climbing above a major resistance line drawn over its 1996, 2000, 2007 highs. That upside breakout suggests that Japanese stocks may finally be emerging from their role as one of the world's weakest stock markets. Since the start of 2013, the Nikkei has risen 57% versus a 28% gain in the Vanguard All World Stock Index (and a 41% gain in the S&P 500). Japan is trying to emerge from nearly two decades of deflation. The latest Japanese inflation figure of 1% is only half of the target rate of 2%. It still has a ways to go.

Is The Latest Breakout A Trick or Treat?

First, let me say Happy Halloween to all!  It's an exciting time for many, but especially the children.  I know our neighborhood is always buzzing with kids anticipating the sugarfest!  :-)

Unfortunately, the stock market bears were SPOOKED on Halloween this year.  I've said for months the biggest problem with shorting all the warning signs I've been seeing throughout 2014 are the central bankers.  We've seen it all too often here in the U.S. - just when it appears there's been irreparable technical damage inflicted on stocks, the Fed steps in with another round of QE or dovish announcements.  On Friday, it was Japan's turn as the Bank of Japan announced an increase in its asset purchase program.  That lifted stocks around the globe and begged the question, "Is this a Trick or Treat?"

Well, no one knows for sure, but I do not pay attention to the headline news that reminds us the key benchmark indices - Dow Jones and S&P 500 - are hitting all-time highs.  Don't misunderstand me, it is significant because it's lifting portfolios everywhere and we're all investing to make money.  But it's more important to me to gauge the risk that I'm taking in order to achieve those nice returns.  Investing heavily while knowing there are signs of an impending major correction or bear market right around the corner is not prudent.

So is this the renewed vigor of a runaway bull market or should we be cashing in our chips?  Let's take a look beneath the surface of this latest rally and then you decide how much risk you're willing to take.

It's important to realize that this latest all-time high on the Dow Jones and S&P 500 comes with 4 out of 9 sectors breaking out recently to year-to-date highs.  3 of those 4 sectors are defensive sectors - healthcare, consumer staples and utilities.  Only industrials have made the breakout among the aggressive sectors with financials and technology on the cusp of doing so.  If we break it down even further, here are the percentages of industry groups within each sector that have broken out:


Energy:  16%

Materials:  20%


Technology:  9%

Financials:  33% (excluding the defensive REITs, this would be 21%)

Industrials:  38%

Consumer Discretionary:  22%


Healthcare:  80%

Consumer Staples:  40%

Utilities:  80%

To summarize, 60% of the industry groups in defensive sectors have supported the breakout in our major indices, while just 25% of industry groups in aggressive sectors have gone along for the ride.  That's a significant variation that certainly suggests traders are hedging their bets and not fully believing in this rally.  And while treasury prices have finally started falling, sending the 10 year treasury yield ($TNX) back above 2.30% and its 20 day EMA, treasuries have been heavily purchased throughout 2014 as our major equity indices have begrudgingly pushed to fresh highs.

This just doesn't pass the smell test to me, but we can't ignore the "candy store" remaining open at central bankers everywhere.  This is unprecedented and really makes technical analysis more challenging currently.  Technical analysis does require the study of history and historical prices and the Fed's (and all central bankers) QE measures have not been a part of history - at least not to the extent we're seeing it now.  

There are industry groups that look particularly attractive, but before I get to those, let's take a look at one positive development technically.  The weekly MACD on the S&P 500 has been signaling slowing momentum throughout 2014.  The weakness we saw in October actually has helped to alleviate that technical issue moving forward.  Check out this chart:

So I consider this at least one red flag erased.  There are plenty more to go though, including the lagging Russell 2000.  While its larger counterparts are breaking out, this small cap and much more aggressive index remains roughly 3.5% from a breakout.

We want to see leadership from aggressive areas of the market.  Despite all the Fed's great intentions, many traders simply haven't bought into all the hype that the Fed has resuscitated our economy and it will perform well on its own as we move forward.  There's also the concern of how the Fed reverses its bloated balance sheet.  But I'll leave that for another day.

Today, let's talk about a key aggressive industry group that is leading the recent action.  Consumer Finance ($DJUSSF).  We finally saw a breakout last week after a long basing period in this group that can be seen on both the daily and weekly charts below:

I am now offering a FREE chart of the day every day the stock market is open. It will be highly educational and also present possible trading opportunities.  Monday's chart of the day features perhaps the best stock within that consumer finance space.  CLICK HERE to register.

Happy trading!

Tom Bowley
Chief Market Strategist
Invested Central

Japanese Stimulus Delivers A Sweet New High To US Markets

The continued desire of central banks to stimulate the economy seems to be onto its next round.

With the Halloween announcement of the Japanese Pension Fund spending $247 Billion on equities worldwide and at least 1/2 of that on foreign equities, it would appear a new buyer is showing up for work. While this is not the central bank directly, the central bank announced more bond buying, which happens to match the Pension fund wanting to unload about $250 billion. By selling to the Bank of Japan, the pension fund has found a way to move the bonds out of their portfolio. If we were to follow the trend of "Show Me The Money" the Japanese have just announced a massive catalyst. This additional capital, which is equivalent to 3 months of the QE3 US stimulus, may provide another opportunity to continue to the bullish ascent.

With the $COMPQ volume on Friday only slightly above the 50 DMA average, I am suspect of the $SPX/Nasdaq highs. We'll continue to watch next week as some high beta name stocks did not trade well this week. Stocks like Facebook (FB), Alibaba (BABA), Tesla(TSLA) and Gilead (GILD) have not followed the market higher over the last 3 days, leading me to be cautious of the high fliers. While even great stocks don't rise every day, you would expect them to run when the overall market is up a full 3 percentage points. With MSFT returning in strength and AAPL hitting new highs, the charts of Microsoft and Apple are very similar to the chart of the $SPX. However, Facebook made highs on Tuesday morning, gapped down after blowout earnings and a poor conference call, then built a doji on Friday. Gilead (GILD) had a good candle on Friday's last hour or it would have closed the week without enjoying any of the ripping rally. It did make a high Friday morning on the open, but sold off most of the day in an up day market. The volume on Gilead was 25% higher for the week with little more than a doji candle to show for it. The Nasdaq was up 1.4% on Friday alone.

TSLA made highs on Tuesday with FB and BABA. Tesla closed near the high of the week. BABA reports on Monday. GOOGL tracked the $SPX all week. Just interesting how many of the high fliers made highs on Tuesday with Wednesday, Thursday and Friday so bullish for the indexes.

There might be more opportunity in the Japan Hedged ETF (DXJ) with the announcement or the Hedged European ETF (DBEU) if more stimulus is coming from Mario Draghi and the ECB.  It will be important to hedge the currency because the Yen and the Euro have not been doing well. 

In summary, follow the money. It appears to be coming to Japan (DXJ) and the EU next.The EU ETF (DBEU) only has 300,000 - 500,000 shares a day trade. I would watch Gilead (GILD) closely. It may have a better week next week, but this week was not as strong as I would have expected. With only 42% of the Nasdaq Composite above the 200 DMA that seems weak after 2 weeks of going vertical. Almost 75% of the $SPX is back above the 200 DMA so that is much better. The Nasdaq 100 has 78% bulls. They would be in the $SPX list too. I sport very mixed emotions on the rally leadership.

Good trading,
Greg Schnell, CMT


Array of New Highs Reflects Broad Market Strength

Not every index and not every sector recorded a new high this week, but several key indexes recorded new highs and the majority of sectors hit new highs. This shows broad market strength that validates the long-term uptrend in stocks. The only negative is that stocks are short-term overbought after big moves. This negative, however, is actually a positive because it takes strong buying pressure to become overbought. On a closing basis, the Dow Industrials, the S&P 500, the Nasdaq 100 and the Dow Transports recorded new 52-week highs this week. The S&P Small-Cap 600 and the S&P MidCap 400 remain below their 52-week highs, but both indices surged over 10% with very strong moves. At this point, the majority of the major indices hit new highs and this is long-term bullish.  

The offensive sectors also performed well with the Finance SPDR (XLF), Technology SPDR (XLK) and Industrials SPDR (XLI) hitting 52-week highs on a closing basis. The Consumer Discretionary SPDR (XLY), which is the fourth offensive sector, is less than 2% below its 52-week high. Also note that the HealthCare SPDR (XLV), Consumer Staples SPDR (XLP) and Utilities SPDR (XLU) hit new highs this week. That means six of the nine sectors hit 52-week highs this week. The majority of sectors are clearly in long-term uptrends and this also supports a long-term uptrend for stocks in general. 

Good trading and good weekend!
Arthur Hill CMT

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