Looks like Friday had traders on the edge of their seats as the S&P 500 attempted to put in a new all-time high. Last week we did see Gold begin to weaken from its short-term up trend as we discussed in last week's outlook. The equity market appears to be in a period of consolidation and so I will address that further into the post.
Equity Trend
You may be wondering why I always start this weekly post with the Equity Trend when it hasn’t changed for months. While the trend has continued to be positive I think it’s critical to understand where the overall trend of the market is before taking another step in market analysis. So yes, the trend of the S&P 500 is still positive as a new high was challenged, although not achieved during trading last week.
Equity Breadth
There are different versions of the Advance-Decline Line that take into account different sets of stocks. The one that I use for my Weekly Technical Market Outlook takes into account all of the NYSE stocks. Each day as I review my charts I also look at the Volume Advance-Decline Line, Common-Stock Only, Small-Cap, and Mid-Cap Advance Decline Lines as well. Each of these tells a different story about the health of the market. The most commonly discussed measure of breadth looks at all of the holdings in the NYSE, which is why I use it for this post. But I would argue that Common Stock Only is much more important in understanding potential turning posts. If I begin seeing changes in one of the other Advance-Decline Lines, I’ll be discussing it in a post at the appropriate time. As of right now, they all are moving in similar fashions.
With the increase in the Advance-Decline Line I’ve drawn a short-term trend as shown by the dotted red line in addition to the long-term up trend shown by the solid red line. Both measures of Breadth we discuss each week experienced some consolidation last week, while staying firmly in up trends.
Equity Momentum
Momentum for the S&P 500 is still diverging from price in all three of the indicators I show on the chart below. The Relative Strength Index is currently unable to break above 60 as it nears a bear market range with the equity market challenging a new high. The MACD, while well off its lows, is still unable to meet its previous high.
Energy Sector
I’ve noticed the SPDR Energy Select Sector Fund ETF (ARCA:XLE) chart showing an interesting set up. We have price approaching a new high, although it still is underperforming the S&P since last September. The Relative Strength Index hasn’t been ‘overbought’ since last May and that only lasted one day. Momentum has slowly drifted lower as it has diverged from price.
Taking a look at volume, with the On Balance Volume Indicator, which adds the amount of shares traded on positive days and subtracts them on down days – we’ve seen a fairly large increase on this metric since February. It appears more shares are being trading on positive trading days for XLE than negative days, a bullish sign for higher prices.
Looking at the underlying stocks that make up the energy sector in the Advance-Decline Line for XLE, I’m seeing a defined downtrend from the high last October. Participation in the advance/consolidation in price for XLE has weakened considerably over the last several months, which doesn’t bode well for energy bulls.
I say this is an interesting setup because we have conflicting information. We have bullish volume over the last month but breadth for the sector in a downtrend with momentum becoming stagnant as it refuses to break into ‘overbought’ status, while at the same time only falling under 35 for a short period of time in January. On the downside, XLE has respected its 100-day Moving Average, so I’ll be watching for this to act as potential support on any further weakness.
60-Minute S&P 500
As I mentioned in the first paragraph, the S&P 500 appears to be in a short-term consolidation. With price having difficulty breaking 1883 and treating 1840 as support. We saw trading end last week with the equity market holding its 50-1hr moving average. The MACD momentum indicator is still showing a negative divergence from price, refusing to confirm the attempted move higher in the equity index. I’ll be watching for this short-term range to break this week, with price holding short-term support last week I would expect price to break to the upside, but we may see the MACD win out and price begin to confirm the signs being shown in momentum.
Last Week’s Sector Performance
Our year-to-date leaders, Utilities (via SPDR Select Sector - Utilities ETF (XLU)) and healthcare (via SPDR Healthcare ETF (ARCA:XLV)) took it on the chin last week as the worst relative performers. The Healthcare sector took most of its damage on Friday as biotech began bleeding. The financial sector (via the Financial Select Sector SPDR Fund (ARCA:XLF)) was our strongest performer with technology (via the SPDR Select Sector Technology Fund (XLK)) coming in second.
Year-to-Date Sector Performance
While showing signs of weakness, it wasn’t enough to take the title of strongest YTD performers from utilities and healthcare. Consumer discretionary (cyclicals) (via the SPDR Consumer Discretionary Select Sector ETF (ARCA:XLY)) and energy (via the SPDR Energy Select Sector Fund ETF (ARCA:XLE)) are now the worst performing sectors year-to-date.
Major Events This Week
We get another update to Q4 ’13 GDP this week as well as some important housing market data sets, including the Case-Shiller Home Price Index.
Monday: Chicago Fed National Activity Index
Tuesday: Case-Shiller Home Price Index and New Home Sales
Wednesday: Durable Goods Orders
Thursday: Jobless Claims, Pending Home Sales, and GDP
Friday: Personal Income and Outlays
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.