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.... Weekly Market Review & Outlook |
Stocks followed through this week with small-caps and large-techs leading the charge. Large-techs and QQQ have been leading the market all year. Small-caps were lagging the market from January to mid April, but turned it around the last two weeks as the S&P SmallCap iShares surged to a new high. Last week I was looking for three confirming indications and all three were met early this week. SPY broke out of its triangle, High-Low Percent for the major indexes surged above +10% and two other sectors ended their corrections (XLI and XLV). There is some concern that this week's surge more resembles the early July surge than the mid November surge, but it has yet to fail. There is always some part of the market to be concerned about, but the weight of the evidence is clearly bullish right now and this bodes well for the majority of stocks. Note that I will post a companion video tomorrow
and update the Art's Charts ChartList.
High-Low Percent Follow Through
Stocks followed through this week with a surge and new highs expanded to their highest level since February, a mere two months ago. The chart below shows High-Low Percent for the S&P 1500, S&P 500, S&P MidCap 400 and S&P Small-Cap 600. While the recent expansion of new highs is bullish, notice that High-Low Percent for the S&P 1500, small-caps and mid-caps remains well below the mid November levels. As the new high expansion currently stands, it is looking more like early July (blue shading) than mid November. The July surge did not last long and gave way to a correction from August to October. We can blame energy and finance for the lackluster expansion in new highs.
MDY and SPY Follow Through
The S&P 500 SPDR (SPY) surged above triangle resistance on Monday-Tuesday to signal a continuation of the bigger uptrend. The 50-day SMA (not shown) has been above the 200-day SMA since mid April and SPY is well above the 200-day. EMA or SMA? It really doesn't matter that much. The triangle represents a flat correction because there was not much of a pullback. This is testament to paltry selling pressure at relatively high levels. A strong breakout should hold so short-term oriented traders can watch 236 for a re-evaluation. The late April low marks support and a break below this level would signal a return to the correction.
The S&P MidCap SPDR (MDY) also followed through with a gap-breakout on Monday. The breakout zone around 310-312 turns first support to watch. The March-April lows mark a more important support level that holds to key to the current advance. A break here would argue for a correction, but not a long-term downtrend or bear market.
Large Techs and Small Caps Lead
QQQ didn't really correct from mid February to mid April as the ETF simply labored higher. Thus, the ETF held up the best during the market's correction and performed the best over the last two weeks. The breakout zone around 132.5 turns into the first support zone to watch on a pullback. The indicator window shows RSI with a bearish failure swing and negative diverge that did not work. As far as I am concerned, negative divergences are not reliable signals because they almost always form in an uptrend. Why look for something bearish when the trend is clearly up!
Small-caps are leading over the past month and over the last six months, but lagging year-to-date. IJR is up around 20% since October 27th and up just 3.21% year-to-date. However, small-caps clearly perked up over the past month with IJR surging around 4% and leading. This is net positive and the ETF even hit a new high this week. As far as I am concerned, the key breakout occurred around 68.5. Even though chartists could mark resistance in the 70-71 area, I do not consider this level resistance because we are in a bull market. I expect resistance levels to be broken in bull markets and they are, therefore, not that important. Support levels, on the other hand, are important because they are expected to hold. Support breaks tell us that selling pressure is picking up and the uptrend may be in jeopardy. Thus, the 68.5 area is the first support level to watch short-term and the 66.5-67 area should be watched longer-term.
Sector Balance is Clearly Bullish
The sector balance has been net bullish and became even more bullish this week. Note that I do not adhere to the traditional sector rotation model that warns of problems when certain sectors lead or lag. Instead, I am simply measuring the percentage of sectors that are bullish and the percentage that are bearish. The S&P 500 has a bullish bias when more than 50% are bullish and a bearish bias when more than 50% are bearish. By my tally, XLY, XLK, XLB, XLI, XLV, XLU and XLP are firmly in the bullish camp. XLF has some work to do and XLE remains the weakest sector. XLE is down around 9.5% year-to-date and XLF shows the smallest gain.
Percent above 200-day EMA Reflects Broad Strength
I showed a ranking of sector High-Low Percent on Tuesday and today I will show a chart ranking the sectors by the percentage of stocks that are above their 200-day EMA. I consider this indicator bullish when it moves above 60% and it stays bullish until it moves below 40%. Note that eight of the nine sectors have been bullish since January. Also note that three are above 90% and this trio includes the lowly finance sector. This metric suggests that the finance sector is long-term bullish and any weakness is deemed a correction. At 73%, the consumer discretionary sector is the least strong of the bullish sectors, but still clearly bullish overall. Energy is the weakest because it triggered bearish in early March and remains bearish. Energy is only for bottom pickers and I will focus on oil a little later.
XLK, XLY, XLI and XLB Lead with New Highs
Amazon, Comcast, Starbucks, Lowes, Home Depot, McDonalds, Disney and Priceline continue to lead the consumer discretionary with new highs this past week. This is a nice group of leaders and proves that it is not just Amazon. The 9-day Rate-of-Change (~4.8%) is the highest since mid November, but this surge is coming on top of a 14% surge. I do not want to speculate on a blow-off top, but I would prefer to wait for a pullback and a setup to unfold before dipping my toe in the water.
XLK surged to a new high as well. Even though this is hindsight, notice that RSI dipped below 40 to became short-term oversold-ish on April 12th and then moved above 40 on April 17th to signal an upturn. Sometimes RSI does not make it back below 30 when the trend is strong. The red dashed lines show prior instances when this occurred. Returning to the price chart, the March lows mark support at 52.
The Industrials SPDR (XLI) broke out of a triangle consolidation and hit a new high (intraday). Even more impressive, XLI did this without help from GE, which fell around 4% over the last five days. MMM, HON, UTX, UNP and LMT hit new highs this week. The lower window shows UPS attempting to break out of a three month base. Companies do not get more global or more economically sensitive than UPS so a breakout would be bullish for the sector and the market overall.
The Materials SPDR (XLB) surged off support and hit a new high this week. Steel and mining stocks are weak, but chemical stocks are lifting this sector. Notice that chemical stocks dominate the top ten and the DJ US Specialty Chemicals Index hit a new high as well.
Equal-weight and Small-cap Healthcare Lead
The sector SPDRs do not always reflect what is happening to the average stock in the sector because they are weighted by market cap and favor large-caps. Chartists can dig deeper by looking at breadth indicators, the equal-weight sectors and the small-cap sectors. For example, the EW Healthcare ETF (RYH) and the SmallCap HealthCare ETF (PSCH) hit new highs this week, but the HealthCare SPDR (XLV) did not. This suggests broad strength within the sector and some relative weakness from large-cap healthcare stocks. Elsewhere, the SmallCap Utilities ETF (PSCU) is up over 14% the last seven weeks and the Utilities SPDR (XLU) is up just 3.5%.
Biotech ETFs End Corrections with Breakouts
Within the healthcare sector, the Medical Devices ETF (IHI) surged to a new high this week and the HealthCare Providers ETF (IHF) is very close to a new high. Biotechs are also picking up with the Biotech SPDR (XBI) breaking out on Monday and the Biotech iShares (IBB) breaking out on Tuesday. The charts below show IBB and XBI hitting new highs in March and correcting into April. Both retraced 38-50% and returned to their breakout zones, which is typical for a correction within an uptrend. This week's breakouts signal an end to the corrections and a resumption of the bigger uptrends.
XLP and XLU Underperforming this Month
The Consumer Staples SPDR (XLP) and the Utilities SPDR (XLU) may be underperforming over the past month, but they are still in uptrends and well above first support. XLU has a potential pennant working and a breakout could keep the uptrend alive. XLP hit a new high on Tuesday and remains well above first support.
Finance SPDR Gaps above Wedge Line
After hitting a new high in early March, the Finance SPDR (XLF) pulled back with a wedge into April. The ETF broke above the wedge line with a gap on Monday and then stalled near resistance in the 24 area. The gap and breakout provide the first signs that the correction is ending and the bigger uptrend is resuming. Now we need a little follow through to solidify the breakout. Traders can re-evaluate if XLF fills the gap.
Regional Bank SPDR (KRE) Bids to Hold Gap
Within the finance sector, the Mortgage REIT ETF (REM) hit a new high, the Insurance SPDR (KIE) broke out and the Regional Bank SPDR (KRE) gapped up. The chart below shows KRE gapping up and closing above its late March high (resistance) on Wednesday. This looks like a breakout and there is a bullish failure swing in RSI, which is a bullish signal. KRE is stalling near the breakout zone, but I would not re-evaluate unless the ETF closes below 53 and fills the gap.
Energy SPDR Gaps to New Low for the Year
The Energy SPDR (XLE) gapped down on Thursday and hit a new low for 2017. This simply extends the downtrend and there is not much to add. As pure speculation, this gap would turn into an exhaustion gap if the ETF can fill it and close above 69.50. Such a move would provide the first sign that XLE is trying to put in some sort of a bottom. It would take a break above the April high to fully reverse the downtrend.
Oil Tests Big Support Zone
The cup is half empty for oil right now, but crude is at a support zone and chartists should watch for a bounce. Note that I moved to June 2017 crude in the lower window. The red dotted line marks $50 oil and crude has crossed this level on a regular basis. Even though oil is currently below $50, there is a lot of support in the 47-49 area from the lows extending back to September. A break below 47 would clearly break this support zone and target a move to the low 40s. As long as support holds, chartists should watch for a close above 50.5 to signal an upturn off support. Such a move would be positive for energy related stocks and ETFs (XLE, XES, FCG and XOP).
Housing Hits High and Retail Holds Breakout
Within the consumer discretionary sector, the Retail SPDR (XRT) is holding its breakout and the Home Construction iShares (ITB) scored a new high. Also note that the EW Consumer Discretionary ETF (RCD) hit a new high this week. It is hard to be negative on stocks or the US economy with RCD and ITB hitting new highs, and XRT holding its breakout. The chart below shows XRT with two lows marking support in the 40.5 area and a break above the intermittent high. This breakout is valid as long as 42.5 holds.
TLT Fails to Hold Breakout
The 20+ YR T-Bond ETF (TLT) fell sharply over the last seven days and close below the breakout zone on Tuesday. This is the early sign that the breakout in TLT is failing and the short-term uptrend is reversing. This could be a very important development for the stock market because lower bond prices (higher yields) would be positive for banks.
I am also watching bonds closely because the bond market is very sensitive to economic prospects and the surge from mid March to mid April put a damper on these prospects. As David Rosenberg noted in a recent interview, the bond market is often smarter than the stock market so we should pay close attention. A surge in bonds (plunge in yields) would weigh on banks and probably the broader market.
I also confirm my TLT analysis with charts for the 10-yr T-Yield ($TNX) and 30-yr T-Yield ($TYX). Notice that the 10-yr Yield is back near the support break and on the verge of negating this break. The 30-yr moved above the support break and negated this support break. A close back below 29 (2.9%) would reverse turn the swing back down and point to lower yields (high bond prices).
Gold Pulls Back within Rising Wedge
The Gold SPDR (GLD) is negatively correlated to the 10-yr yield and the Dollar, both of which fell over the last six weeks. Continue weakness in both would be bullish for bullion, while upturns in both would be negative. On the price chart, GLD hit the 61.8% retracement and fell back over the last seven days. A rising wedge could be forming and the trend is up as long as the wedge rises. Wedge support is set at 118 and a break here would be bearish for gold. Short-term, I am watching the seven day pullback within the wedge. A breakout at 121 would reverse this pullback and keep the bigger uptrend alive.
Euro Surges, Dollar Plunges and Wedges Remain
Despite big moves in the Euro, Dollar and Yen, the 2017 trends remain unchanged. The Dollar is trending lower this year, while the Euro and Yen are trending higher. These 2017 trends, however, appear to be running counter to the bigger trends. In other words, the Dollar appears to be correcting within a bigger uptrend. Look for a break above 26.1 to reverse the 2017 wedge and signal a continuation of the bigger uptrend.
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Spotting Pullbacks and Upturns within an Uptrend using RSI and MACD Histogram.
Difference between EMA and SMA - Using %Above 200-day EMA for Breadth Analysis.
Backtesting Different Moving Average Pairs with SPY, QQQ and IWM.
ETF Master ChartPack - 300+ ETFs organized in a Master ChartList and in individual groups.
Follow me on Twitter @arthurhill - Keep up with my 140 character commentaries.
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Thanks for tuning in and have a good day!
--Arthur Hill CMT
Plan your Trade and Trade your Plan
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