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.... Market Breadth is Bullish Enough .... New Highs Still Outpacing New Lows .... SPY Notches another New High .... Equal-weights Keep Pace on the Chart .... QQQ Surges to New High .... Majority of Sectors Confirm New Highs .... XLY and XLK Lead Recent Surge .... Regional Banks Weigh on Finance Sector .... 10-yr T-Yield Makes Breakout Attempt .... GLD Breaks Big Wedge .... Dollar Hits 52-week Low .... Howard Marks Memo .... |
----- Art's Charts ChartList (updated 28-July) -----
Broad Market Breadth is Bullish Enough
Broad market breadth is not as strong as it was earlier in the year, but it is still more bullish than bearish. This highlights the challenge with indicator divergences. A bearish divergence occurs when an indicator forms a lower high and the underlying index (or stock) forms a higher high. The divergence tells us that the indicator is not as strong as it was when the underlying index last reached significant high. Less strength, however, does not guarantee a reversal. It just means the indicator is not keeping pace with the index. Most significant reversals will be accompanied by an indicator divergence, but not all divergences will foreshadow a reversal.
The chart below shows the percentage of stocks above the 200-day EMA for the S&P 500, S&P Mid-Cap 400 and S&P Small-Cap 600. The red arrows mark the peaks and the red lines mark the "divergences", which have extended for months. Despite fewer stocks above their 200-day EMAs, these three indexes rose from February to July. Evidently, enough stocks remained above their 200-day EMAs to keep the rally going.
All three indicators are currently above 65% and bullish. The gray horizontal lines on each chart mark the 40%, 50%, and 60% levels. I consider the indicators bullish when they move above 60% and this bullish signal stays until they move below 40%, which triggers a bearish signal. Notice that all three have not been below 50% since early November, scene of the last meaningful correction. The broad market clearly has a long-term upward bias when 50 plus 1 percent of stocks are above their 200-day EMA. I look for a little more critical mass before turning long-term bearish and require 40 minus 1 percent to be above their 200-day EMA before turning long-term bearish. This implies that 60 plus 1 percent are below their 200-day EMA.
Video Note: I will cover all nine sector SPDRs in the video, which will be posted by noon Friday. This will incude the recent bounces in XLE, XLP and XLU, as well as the pullback in XLI. I will also cover the industry group ETFs, including XBI, IBB, XES and XRT.
New Highs Still Outpacing New Lows
There are also fewer new highs in July than June, but new highs are still outpacing new lows. The chart below shows the High-Low Lines for the S&P 1500, S&P 500, S&P Mid-Cap 400 and S&P Small-Cap 600. All four have been above their 10-day EMAs since early November. This means new highs continue to outpace new lows. I would not become concerned for a correction until these High-Low Lines turn down and break their 10-day EMAs.
SPY Notches another New High
SPY broke out of its third consolidation pattern and surged to a new high. The current bull run began with the November surge and breakout. Note that the decline from mid August to early November was the last pullback greater than 4% and longer than eight weeks (4.6% to be exact). The blue callout boxes mark the three consolidation periods. The most recent consolidation, which is the falling wedge in June-July, held the 240 area and the index broke out with the gap-surge to 244 on July 12th. This breakout reinforces first support in the 240-241 area and this is the first level to watch for signs that a correction is starting.
I do not want to cross the correction bridge until we have a signal. Just as winter in Game of Thrones, the correction is coming, but nobody knows exactly when. A pullback to the rising 200-day SMA would be a logical target should the elusive correction materialize. This SMA is currently around 6.5% below current price levels.
Equal-weights Keep Pace on the Price Chart
Large-caps are still stealing the performance show, but the EW S&P 500 ETF (RSP) is keeping up on the chart with a fresh 52-week high. Thus, it is not just a large-cap rally. There are plenty of small and mid cap stocks partaking. The indicator window shows the RSP:SPY ratio hitting a new low in early June and flattening out. An upturn and break above the red resistance zone would signal relative strength in the equal-weights of the world (small and mid caps).
QQQ Surges to New High
QQQ was lagging the market and correcting before my vacation as it fell below 136 in early July. The ETF hit a new high in early June so the decline was considered a correction within an uptrend. A falling wedge took shape as the ETF retraced 50-61.8% of the prior decline and RSI dipped into the oversold zone. This turned out to be a great mean-reversion setup as the ETF broke above first resistance on July 10th and surged to new highs over the last two weeks. The new high is a bullish observation, not tradable analysis. At this point, I will just wait until the next short-term setup materializes. Perhaps a throwback to the 140 area will do the trick.
Majority of Sectors Confirm New Highs
On a closing basis, six of the nine sector SPDRs hit new highs in July (consumer discretionary, technology, materials, finance, industrials and healthcare). The first four in the list hit new highs this week. It is clear that the majority of sectors are in long-term uptrends and participating in this broad market advance. Industrials and healthcare weakened somewhat over the last 1-3 weeks, but I do not see any long-term negatives on these charts. SPY bottomed on July 6th, gapped up on July 12th and hit a new high on July 14th. The latest short-term run is three weeks old (15 days) and the PerfChart below shows sector performance during this run. Notice that consumer discretionary (cyclicals), technology, energy and utilities are leading. Yes, it is a motley crew. Industrials, healthcare and finance are lagging over the last three weeks.
XLY and XLK Lead Recent Surge
The Consumer Discretionary SPDR (XLY) chart shows the July 6th low and the July 12th gap for reference. Overall, the trend is clearly up and the falling wedge was a correction within this uptrend. XLY broke out and hit a new high to affirm the overall uptrend. The Technology SPDR (XLK) chart shows a similar setup and new high. The gap and the breakout zone mark the first support level to watch on a pullback.
The Materials SPDR (XLB) is also leading with a fresh 52-week high three days ago. The green lines mark a rising channel to define the overall uptrend. The blue lines mark the falling wedge or short pullback into July. XLB broke out on July 10th and raced to new highs.
Regional Banks Weigh on Finance Sector
The Finance SPDR (XLF) surged on Tuesday with a gap and new high, and then fell back towards the flag break. I do not want to read too much into a failed gap or a failed flag breakout because the bigger trend is up and I should focus on bullish setups. The wedge breakout in mid June ended the corrective period and XLF is now in a trend resumption period. In other words, the advance from October to February resumed with the wedge breakout.
The Regional Bank SPDR (KRE) shows the frustration within the finance sector. Technically, the correction ended with the wedge breakout in June. In reality, the uptrend over the last few months is ever so slight and the ETF remains well below its March high. A slight uptrend is more bullish than bearish so I will stay bullish on KRE as long as 52 holds. Note that banks are positively correlated to the 10-yr T-Yield ($TNX) so we should watch it closely for clues.
10-yr T-Yield Makes Breakout Attempt
The 10-yr T-Yield ($TNX) and the 30-yr T-Yield ($TYX) are attempting to end their corrections and resume their uptrends. Note that both hit 52-week highs in December and both corrected into June. Their 200-day SMAs are rising and this also points to a long-term uptrend at work. $TNX broke the wedge trend line in late June, fell back to the breakout zone last week and bounced this week. I will treat this breakout as bullish for yields as long as 22 holds, which is 2.2% for the actual yield.
The 20+ YR T-Bond ETF (TLT) and 7-10 YR T-Bond ETF (IEF) move opposite of yields. They are expected to fall if the 10-yr yield rises. TLT advanced from March to June and retraced just over 50% of the prior decline. This means the advance could be a bear market rally or correction with a bigger downtrend. TLT tested support with a sharp decline in early July, bounced and then formed a lower high last week. A break below the support zone would clearly reverse this uptrend and call for a move below the December-March lows. I will mark resistance at 126 and maintain a bearish bias on TLT as long as this level holds.
GLD Breaks Big Wedge
Gold has gone nowhere since February and is probably going to follow TLT because there is a strong positive correlation between the two. Thus, a breakdown in TLT would be negative for gold. On the price chart, GLD fell sharply from July to December and then retraced a little over 61.8% with a bounce back to the 122-124 area. The ETF hit resistance here twice and broke the wedge line in late June. GLD also exceeded the May low to forge a lower low. This looks like a bearish development for the long-term, which is 3-6 months in my brain. Short-term, GLD bounced the last two weeks and retraced 61.8% with a move back to 120. The green Raff Regression Channel defines this bounce and a break below 118 would reverse the upswing.
Dollar Hits 52-week Low
The US Dollar ETF (UUP) sank to a 52-week low this week and the Euro ETF (FXE) hit a 52-week high. Thus, the Dollar went from a 52-week high in early January to a 52-week low in late July. While the decline certainly looks overdone and the Dollar seems ripe for a bounce, there are no signs of strength on the price chart. I keep lowering resistance for UUP and raising support for FXE.
Howard Marks Memo
And finally, I will leave you with a long memo from Howard Marks, Co-Chairman at Oaktree Capital. This is one of his longer memos, but worth a read because he offers some good insights. As Marks notes on his previous warnings: When I wrote them, they appeared to be wrong for a while. It took time before they were shown to have been right, and just too early. Just consider this food for thought as we head into the August-September period. Click here.
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--Arthur Hill CMT
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