Editor's Note: This article was originally published in John Murphy's Market Message on Wednesday, September 11th at 5:14pm ET.

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Smaller stocks were the stars of today's stock action. Previous messages have noted signs of improvement in the group which has lagged behind large cap stocks since last September. The daily bars in Chart 6 show the Russell 2000 Small Cap Index gapping sharply higher today. The RUT now appears headed for a challenge of its falling resistance line drawn over its May/July peaks. The RUT/SPX relative strength ratio (solid line) has risen above a falling trendline which signals the end of six months of underperformance. That's part of the recent rotation into cheaper parts of the market that's taken place this month, and is helping to broaden out the stock rally. New buying in smaller stocks is a good sign for them; and for the rest of the market as well.

Chart 6

I’ve written before about RSI and the difference between “good” overbought and “bad” overbought. In the future, we may see the bond prices of these past few weeks used as examples of how to interpret extreme overbought conditions. A review of the stock-to-bond ratio shows how investors may have rotated too quickly from bonds back to stocks.

As interest rates dropped in recent months, the charts of bond ETFs appeared to be trending up and to the right with no end in sight. Frequent overbought conditions (RSI > 70) usually continued on to become extremely overbought (RSI > 80). This often leads to a brief correction preceding a resumption of the uptrend.

Something different happened in early September, when the push higher from a couple weeks ago was met with an RSI just above 70. Not extremely overbought, just regular overbought. That means probable downside corrective movement. This also resulted in a bearish divergence between price and RSI for most of the major bond ETFs, another confirmation of downside potential.

One of the charts I review regularly on The Mindful Investor ChartList is the ratio of stock-to-bond prices in the form of the SPY vs. the TLT.

I’ve tracked the cyclical nature of this ratio by manually placing red and green arrows to signify downtrends and uptrends, respectively. What’s funny is that the ratio has to move significantly in the opposite direction before I can bring myself to place the new arrow and acknowledge the recent trend reversal.

Just this week, I finally had to place the green arrow, representing the rotation away from bonds and into stocks. The question now is, “Is that sustainable?”

As a trend-follower, I have to assume that trends in motion will remain in motion. But a quick review of the RSI suggests that the ratio has moved just about enough in the current direction.

The AGG chart shown earlier indicates an RSI just above the oversold level, currently around 34. If the RSI dips below 30, the chart will jump on my radar for potential upside reversal.

The daily chart of the S&P 500 shows an RSI right around 60. While this is not near the overbought region just yet, it’s right at the point where I’d expect a downside reversal if the broader market trend is down.

That is, in a bear market phase (which I would argue we’re still in), market rallies often end with an RSI around 60. A failure around the RSI 60 level tends to confirm a corrective market phase, as bulls are unable to push the market any higher.

What’s really interesting is we can apply RSI to the ratio itself.

Here we see an RSI around 66, similar to where the ratio topped out in April and July. The ratio and the RSI can certainly go higher, but it’s telling that we’re now in the range where this ratio has topped out earlier in the cycle.

Overall, trends can last way longer than investors often expect. But a quick read of momentum on stock prices, bond prices, and the stock-to-bond ratio tell me that a reversal from stocks back to bonds is possible and worthy of consideration.

RR#6,

Dave

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David Keller, CMT

Chief Market Strategist, StockCharts.com

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I've been adamant that we remain in a secular bull market, and I'm sticking to it. Yes, September scares me. The Fed petrifies me. And no more tweets, please! Oh, and let's not forget about the inverted yield curve (which isn't inverted any longer, by the way). But, despite all of that, here we sit on the brink of yet another record all-time high on the Dow Jones, S&P 500 and NASDAQ. It's going to happen.

Over the past week, we saw new leadership emerge. Financials (XLF) did very well, as did industrials (XLI). It's easy to forget, but these two sectors were our leaders from 2016 through early 2018, when we raced to new record highs with only the slightest hint of volatility. The small-cap Russell 2000's ETF (IWM) is comprised nearly one-third of financials and industrials. These two sectors are very important to the performance of this closely-watched small-cap index/ETF.

One thing we need to keep in mind is that when transports ($TRAN) and small caps ($RUT) perform well, it generally translates into huge S&P 500 gains. Let's use the 10+ years of this bull market to illustrate:

I think this chart is very clear. When the downtrends and/or consolidation periods in both transports and small caps break to the upside, the S&P 500 is likely poised for a major, explosive rally. While we might be premature, an argument could certainly be made that both the TRAN and the RUT broke their downtrends this week. The next few weeks will likely either refute or confirm that statement, but, if it's the latter, prepare for a launch higher in Q4.

Please be sure to sign up for my FREE EarningsBeats Digest newsletter. I'll be writing articles 3x per week, highlighting key earnings and companies showing relative strength (or weakness) characteristics that you won't want to miss. Did I mention it's FREE? CLICK HERE to provide your name and email address to get started!

Happy trading!

Tom

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P.S. My 4+ year stint at StockCharts.com is coming to an end this weekend (although I'll continue writing here and hosting shows on StockCharts TV) as I return to EarningsBeats.com as Chief Market Strategist. I've written a daily report today to highlight the types of things I'll be covering there on a daily basis. To read my first Daily Market Report (which I posted in my Trading Places blog), CLICK HERE. Enjoy!

U.S. retail sales came in stronger than expected for the month of August and, while internet sales and home goods saw a pickup, the real boost in last month’s retail numbers came from auto sales.

The Auto Retail industry is experiencing considerable changes in its operating environments as new technologies and rapid digitalization spur a restructuring of their markets. These changes are bringing improved profit margins, which are also being spurred by an increase in sales due to low interest rates.

Today, I’d like to review several top Auto companies that are incorporating new technologies that have helped drive shares higher.

DAILY CHART OF AUTONATION INC. (AN)

Let’s begin with the country’s largest automotive retailer - Autonation (AN). Shares of this company soared over 10% following their July release of 2nd quarter earnings that topped expectations. In addition to seeing a pickup in same-store sales, the company has struck a strategic partnership with Google’s driverless vehicle unit Waymo, which has been adding value.

The stock consolidated for 2 months following its earnings-driven surge before breaking out of a base on volume earlier this week. Despite a pullback, the stock remains above its $40.6 breakout level and is in a strong buy zone.

DAILY CHART OF CARVANA (CVNA)

Next up is a newer company that operates an e-commerce platform for buying and selling used vehicles. Carvana Co. (CRVA) uses proprietary 360-degree vehicle imaging technology and customers can schedule delivery or pickup from their desktops or mobile devices.

While the company has not yet produced earnings, CVNA gapped up last month on strong sales that were better than expected. Additionally, management guided estimates higher following the release of their 22nd consecutive quarter of triple digit revenue growth.

Beyond excelling at digital sales, the company has erected 7-story housing for vehicles at several locations that resemble vending machines. Carvana subsidizes travel to these locations so new owners can collect their vehicles by dropping a large coin into the machines.

The stock has been consolidating following its release of strong revenues and may remain range-bound for longer. Any break above its recent high of $84 on volume would be bullish, particularly if the stock is emerging out of an oversold position.

DAILY CHART OF AMERICA'S CAR-MART (CRMT)

The last stock to be highlighted is Americas Car-Mart (CRMT), a smaller company that primarily sells older-model used cars through 144 dealerships. The company has been updating and growing their digital sales efforts while using technology to manage inventory levels, which is beginning to pay off.

The stock has been trading in a lackluster fashion since late May, when the company reported strong results that were not quite enough given the high valuation CRMT had at the time. This week, the stock is advancing on volume in a bid to break out of a base. A move above $97 would be bullish for the near-term prospects for this company.

Last month’s robust level of car sales suggest that consumers are still confident in the economy, which is good news. In addition to autos, there are other high-growth areas of the market that are benefitting from consumers' optimism. If you'd like to find out about these areas, as well as the select stocks that are likely to outperform the markets, I urge you to trial my bi-weekly MEM Edge Report by using this link here.

Warmly,

Mary Ellen McGonagle,

MEM Investment Research

On the weekly Relative Rotation Graph for US sectors, the Financial sector is positioned just inside the lagging quadrant, very close to the benchmark (center of the chart). It arrived here after a nearly vertical drop from the improving quadrant after failing to rotate into leading.

During the last five weeks, the tail on XLF shrank to being one of the shortest on the plot, which means that the move (downward in this case) has stabilized and is in a position to turn around more easily.

From Weekly to Daily

To get a better grip on the rotational picture for Financials, we need to switch to the daily version of the RRG.

As you can see, the 25-day tail on the daily RRG above matches the 5-week tail on the weekly chart.

What we see here is a solid rotation for the Financials sector from weakening, through lagging and improving, into leading at a strong RRG-Heading. With the strong rotation on the daily RRG and the stable position on the weekly, I am inclined to look at the Financials sector from a (mildly) positive angle.

And Then To the Price Chart

As usual, the proof is in the pudding, which in our case is the price chart of XLF.

People who bought XLF at the start of 2018 and are still holding these positions are just about to break even. Since that time, the area between $28-29 has become a serious resistance level. As it represents a pretty major level, that area should be monitored closely in the coming weeks, as a breakthrough will very likely trigger an acceleration of the recent rally.

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And Finally, Single Stocks

With improvements visible for the sector, it's always interesting to zoom in on the rotations of the individual stocks within said sector. The RRG below shows the rotations for the eight biggest stocks inside XLF.

From this picture, we can immediately see that there are three stocks that should probably be avoided. These are BRK/A, which is inside the improving quadrant but rotating down and back into lagging; C, which is just entering the lagging quadrant; and finally AXP, which is inside weakening but rapidly deteriorating and rotating towards lagging at a negative RRG-Heading.

All other stocks on the plot are showing better tails and rotations. The one that interests me most at the moment is JPM.

JPM entered the leading quadrant in May, then continued to rotate positively for a few weeks before rolling over and dropping into the weakening quadrant in the middle of July. Following this corrective rotation, JPM recovered and curled up again, entering the leading quadrant while picking up pace on both axes.

The weekly price chart only confirms the positive outlook for JPM. With only a couple of hours left before it completes the weekly bar currently in progress, JPM is now comfortable above its resistance area and breaking to new highs.

In combination with the strong relative (rotation) picture, it looks as if JPM is picking up a leadership role inside the financial sector.

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Julius de Kempenaer

Senior Technical Analyst, StockCharts.com

Creator, Relative Rotation Graphs

Founder, RRG Research

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