RSI Hits Moment of Truth, Retail Perks Up and Bond Market Front Runs the Fed

Large-Techs and Mid-caps Lead in September

The September bounce is shaping up rather nicely with the Nasdaq 100 and the S&P MidCap 400 leading the major indices. The PerfChart below shows the month-to-date performance for eight stock indices. The Nasdaq 100 is the clear leader with a 2.55% gain and the S&P MidCap 400 is in second place. Also notice that the Russell 2000 is up more than the S&P 500 and outperforming.

SPY Price Action Shows Bullish Resolve

Even though a rising wedge can turn out to be a bearish continuation pattern, it is bullish until it ain't. In other words, the immediate trend is up as long as the wedge rises. The August breakdowns are the dominant features on most charts, but the price action since late August is quite bullish and the stock market is showing some resilience worth noting.

Here's how it played out on the chart. First, stocks surged off the August low. Ok, that was just an oversold bounce and no big deal at the time. Stocks fell sharply on September 1st as the major index ETFs gapped down and closed weak. At this point, it looked as if we were in for some volatility or a test of the August lows. Mr Market, however, had other ideas and this is where it gets interesting. The major index ETFs firmed after the 1-Sept plunge and gapped up on 8-Sept (the Tuesday after Labor Day). There was no follow through to the 1-Sept decline and the gap-surge on 8-Sept amounted to follow through to the late August surge. Moreover, the 8-Sept gap held throughout the week and stocks moved higher the last two days (Fed be damned!).

RSI Hits Moment-of-truth for SPY, QQQ and IWM

SPY, QQQ and IWM are not on the same page overall, but they are all three in short-term uptrends. SPY joined in the uptrend with a triangle breakout on Wednesday. IWM remains the laggard because it is still well below its August support break. QQQ is the strongest because it has recovered its August support break. This is a moment-of-truth because RSI is in the 50-60 zone on each chart. Assuming the bigger trend is down because of the August support break, one would expect RSI to hit resistance in the 50-60 zone. This is because RSI usually ranges from 20 to 60 in a downtrend and the 50-60 zone is at the top of this range. As far as the short-term uptrends are concerned, the 8-September gaps hold the key and I am using these to mark short-term support.

Bullish Breadth Thrusts for 4 of 5 Indices

Several breadth thrust indicators for the broad market indices flashed bullish signals to reverse the bearish signals from July and August. A bullish breadth thrust occurs when the 10-day SMA for AD Percent breaks below -20% and then surges to exceed +20% in 1-3 weeks.

The chart below shows the 10-day SMAs for AD Percent for the S&P 1500, S&P 500, S&P MidCap 400, S&P Small-Cap 600 and Nasdaq 100. First and foremost, notice that S&P 1500 breadth triggered a bullish breadth thrust as the 10-day SMA for AD Percent moved from -30% on September 1st to +20.09% on Wednesday. The S&P 500, S&P MidCap 400 and Nasdaq 100 also triggered bullish breadth thrusts with moves above +20%. Mid-caps ($MID) and Large-techs ($NDX) are the strongest because their breadth indicators are the highest of the group (+23.77% and +25.30%). The S&P Small-Cap 600 is the laggard because it has yet to produce a breadth thrust. Even though small-caps fell short, the majority of stocks participated in this breadth thrust and it is bullish until countered with a move below -20%.

Consumer discretionary, Tech and Industrials Lead

The PerfChart below shows the performance for the nine sector SPDRs this month. Notice that the Consumer Discretionary SPDR (XLY), Technology SPDR (XLK) and Industrials SPDR (XLI) are the leaders and easily outperforming SPY. XLY and XLK have been strong for some time. XLI is relatively new to the relative strength picture. Staples and healthcare are also doing well, but finance is lagging. Also notice that the Energy SPDR (XLE), Materials SPDR (XLB) and Utilities SPDR (XLU) are still down month-to-date. These three are the real dogs.

Consumer Discretionary Sector and Retail Perk Up

I was quite impressed with the surge in the Equal-Weight Consumer Discretionary ETF (RCD), which was led by retail stocks and the Retail SPDR (XRT). Note that the consumer discretionary sector is the most economically sensitive sector and retail spending drives some 2/3 of GDP. Strength in these two would bode well for the economy and the broader market. On the price chart, RCD and XRT are not out of the woods yet, but recent price action looks promising as both near resistance.

Bond Market Front Runs the Fed with Rate Hike

I cannot speak for the Fed, but I can speak for the bond market and the bond market is pricing in a rate hike. Note that the 2-year Treasury Yield ($UST2Y) broke out to multi-year highs by finally breaking above .75%. Second, the 1-year Treasury Yield ($UST1Y) was already in an uptrend and broke out in July. This short-term yield is also at multi-year highs and the bond market is raising rates for the Fed. Yes, the Fed follows the bond market and the bond market has already raised rates.