The One Key Level // SPY Uptrend with Triangle // IWM Struggling, but above Key Support // Junk Bonds, Treasury Yields and Regional Banks // Percent of 200-day for the Nine Sectors // Webinar Preview ////
The One Key Level
Stocks are under pressure before the open and oil is getting the blame. While I hate to play the blame game and prefer to focus on price action, the financial markets are fixated on the new lows in oil and the possible contagion. I will explore this contagion issue by looking at junk bonds and regional banks. Should the broad market close sharply lower again today, Friday's big gain would be erased and the S&P 500 would be back near last Thursday's low. While this would affect the short-term trend and keep the noise levels high, it would still not be enough to affect the bigger uptrends.
As the CandleGlance charts illustrate, there is really only one level to watch: the mid November lows. SPY, QQQ, RSP, MDY, DIA and IWM are currently above these lows. Further weakness and a close below these lows in the majority of these broad market ETFs show a serious uptick in selling pressure and not be considered mere noise. Such selling pressure would warrant a reassessment of the bigger uptrends.
Of the nine sector SPDRs, XLE and XLU have already broken their mid November lows and show relative weakness. The other seven remain above and bullish until proven otherwise. It is the same for the nine equal-weight sectors. The EW Energy ETF (RYE) and EW Utilities ETF (RYU) broke their mid November lows and show weakness. The other seven have yet to break their mid November lows and reverse their uptrends. The broad market trend would turn down if/when the majority of sectors break their mid November lows (on a closing basis).
SPY Uptrend with Triangle
Last week I showed the S&P 500 SPDR (SPY) with a potential inverse head-and-shoulders pattern. It is potential because it has yet to be confirmed with a break above neckline resistance. I am focused on this bullish pattern because I consider the current trend up since the October breakout and breadth thrust. Also notice that the long-term PPO (20,120,1) and medium-term PPO (10,60,1) are positive. Trading has turned quite volatile since early November and a triangle is taking shape. Trading within the triangle is quite treacherous and best ignored unless you are a short-term trader. Focusing on the bigger picture, this is a consolidation after a sharp advance and represents a rest to alleviate overbought conditions, which were present after the big surge from late September to late October. A move above 211 would break triangle resistance and signal a continuation higher. The big question is: at what point would I question my bullish thesis for SPY? The mid November low and a small buffer mark support at 202. A close below this level would negate the inverse H&S, negate the triangle and forge a lower low. Such a move would warrant a reassessment of the bullish thesis for SPY.
The Nasdaq 100 ETF (QQQ) broke out the second week of October, hit a new high in late October and turned volatile the last five weeks. Nevertheless, 52-week highs happen in uptrends and the bigger trend is clearly up. As with SPY, the mid November low marks the first significant support area to watch. A close below 110 would forge a lower low and call for a reassessment.
IWM Struggling, but above Key Support
The Russell 2000 iShares (IWM) remains the problem child and continues to underperform. There is a bearish case to be made for IWM long-term, but the two month trend remains up with a higher high and higher low. Long-term, IWM broke down in August and retraced 62% of the June-Sept decline with an advance back to broken support in the 120 area. The retracement amount and return to broken support are typical for bear market rallies. I could even draw some trend lines and show a rising wedge, but I think the trend line extending up from the late September low would too steep and prefer to focus on support in the 114 area. A close below 113.6 would break support and reverse the two month uptrend. Such a move would signal a continuation of the June-Sept decline and project a move to new lows. IWM could be the canary in the coalmine so chartists should keep a close eye on this support zone.
Junk Bonds, Treasury Yields and Regional Banks
I have been bullish of the Regional Bank SPDR (KRE), but I am concerned because of recent price action in the 30-YR Treasury Yield ($TYX) and the High Yield Bond SPDR (JNK). This in turn could affect the finance sector as a whole and weigh on the broader market. Weakness in junk bonds stems from the new lows in oil, which should not come as a big surprise because oil has been in a long-term downtrend for some time now. A trend in motion stays in motion. Light crude, Brent crude and heating oil broke support levels in October and moved lower throughout November. The new lows in December are just a continuation of an existing downtrend.
Junk bonds bounced in October, but weakened in November and the High Yield Bond SPDR (JNK) hit a new 52-week low this week. The chart below shows the JNK:LQD ratio, which compares the performance of junk bonds to investment grade bonds. Risk is ON when this ratio rises and OFF when this ratio falls. The ratio bounced in October, but fell in November and hit a new low here in December. This is a concern because there is a positive correlation between the Regional Bank SPDR (KRE) and this ratio. This means KRE tends to rise when this ratio rises and fall when this ratio falls. I realize that the Correlation Coefficient turned negative in November, but I think the overall tendency is what is important here and that tendency is a positive correlation.
The next chart shows a positive correlation between the 30-YR Treasury Yield and the Regional Bank SPDR. This means a rising 30-yr Yield is positive for KRE. The trend for the 30-yr yield is still up, but I am concerned because a lower high could be forming. A break below the August low would reverse the uptrend that started in late April and start a downtrend in long-term Treasury yields. This, in turn, would be negative for KRE.
On the KRE price chart, the ETF gapped to a new high in early November, but filled this gap with a quick decline back below 44. The subsequent bounce failed to exceed the early November high and a lower high formed last week. Even though the long-term PPO (20,120,1) and medium-term PPO (10,60,1) are comfortably above the zero line, a close below the support zone would be quite negative. The indicator window shows the price relative (KRE:SPY ratio) breaking below its mid November low as KRE shows relative weakness here in December.
The focus will likely be on oil in the coming days and weeks. Continued weakness in oil would likely weigh on junk bonds and this could extend to regional banks, which could then spread to the finance sector and weigh on the broader market. Yes, that "contagion" word is coming back. A bounce in oil could provide some relief and prevent a breakdown in the Regional Bank SPDR (KRE). Stay tuned....
Percent of 200-day for the Nine Sectors
The next chart shows the percentage of stocks above the 200-day EMA for the S&P 500 and the nine sector SPDRs. This indicator can be used to rank the sectors and provide a bullish or bearish bias. Instead of using 50% as my bullish-bearish threshold, the indicator is deemed bullish on a break above 60% and remains bullish until a break below 40%, which turns it bearish. This adds a little lag to the signals, but reduces whipsaws substantially by requiring significant buying pressure (>60%) to turn bullish and significant selling pressure (<40%) to turn bearish. As the indicator now stands, the S&P 500 and six sectors are bullish (staples, tech, finance, utilities, healthcare and industrials). This super majority supports the current bull market. The prospects of a bear market would surface if three of these six join the other two bearish sectors and five of the nine sectors are in bear mode.
The sectors are sorted by this indicator with staples at the top and energy at the bottom. The Staples %Above 200-day EMA (!GT200XLP) moved above 60% in October 2011 and has not been below 40% since. Conversely, the Energy %Above 200-day EMA (!GT200XLE) moved below 40% in September 2014 and has not been above 60% since. Elsewhere, the Discretionary %Above 200-day EMA (!GT200XLY) is net bearish since mid November when it moved below 40%. The Industrials %Above 200-day EMA (!GT200XLI) turned net bullish on December 1st with a move above 60%. The Utilities %Above 200-day EMA (!GT200XLU) is the most erratic of the group because there are just 29 stocks in XLU and it is a rather homogenous sector. Even though the sector SPDR symbols are used for these indicators, they are breadth indicators and the signals should be applied to the equal-weight sector ETFs because the sector SPDRs are weighted by market cap.
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--Arthur Hill CMT
Plan your Trade and Trade your Plan
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