TDTrader Weekly Report -- Friday 5-Sept-03
***Market Overview*** -- With a classic post Labor Day surge, stocks extended their gains and many indices distanced themselves from key breakout points. As measured by the S&P 500, stocks have now advanced 18 of the last 21 days (not including Friday, whatever the outcome may be). The S&P 500 is up over 7% and the Nasdaqs are up over 14% in this timeframe. The breakouts are clean and have yet to be proven otherwise. Broken resistance levels now turn into support and a throwback is entirely possible. A throwback is like a mini-correction. After the current 3-4 week advance, the market has become short-term and medium-term overbought. A throwback or consolidation would digest gains and relieve this overbought condition. Shallowness is the key to a successful throwback. A sideways consolidation would be bullish and reflect little, if any, selling pressure or profit taking. A decline back to broken resistance would show modest profit taking and a be considered a normal pullback (SPX 990, NDX 1290, COMPQ 1750 and INDU 9250). Such a pullback may even provide a second chance to partake on the advance. However, a decline back below the resistance breakouts would question the validity of these breakouts and be cause for concern among the bulls.
For sectors and styles, the usual suspects remain at large. Cyclicals, basic materials, tech, transports and industrials are leading the way higher. While these sectors are clearly in bull mode and not candidates for a short sale, they are looking overextended and ripe for a pullback. Pharmaceutical, consumer non-cyclicals, telecom and finance are leading the way lower. While pharmaceuticals and telecoms may be correcting, finance appears to be topping. For styles, it is still small-cap and mid-cap stocks (both value and growth) providing upside leadership with large-caps (both value and growth) lagging. The big caveats remain unchanged. Volume was low during the August advance, but began to expand this week. Volume was above average all three days, but the advance only continued on Tuesday. Wednesday and Thursday were largely consolidation days that reflected a high volume churn. The VIX and VXN still show complacency among the option traders, but these indicators are a distant second to price action. And finally, the Nasdaqs sport large rising wedges on the weekly charts and are near 62% retracement marks. These are potentially bearish retracement patterns, but only until confirmed with at least a trendline break.
This week we will look at:
-- Value Line Versus Nasdaq
-- Finance and Regional Banks
-- Healthcare still not looking healthy
-- Telecoms down, but not totally out
-- Thrust Oscillator still in bull mode
The Value Line Arithmetic Index ($VAY) is an un-weighted index of 1700 stocks. As such, General Electric and Microsoft carry the same weight as Ryan’s Family Steak Houses and Hooper Homes. VAY captures the rank-and-file and best reflects micro-cap, small-cap and mid-cap stocks. Compared to its large-cap brethren, VAY has outperformed most indices over the last few years. However, the pattern shaping up could be the mother of all broadening formations and have bearish consequences in the coming months (magenta trendlines). The two charts compare the Value Line Arithmetic Index ($VAY) with the Nasdaq Composite. The reaction highs and lows match relatively well on the time scale, but not in relation to the price. COMPQ peaked in Mar-00, but VAY went on to new reaction highs in May-01, Mar-02 and Sep-03. In between these reaction highs, VAY dipped to new reaction lows in Sep-01 and Oct-02 (red arrows). The recent move from lower low to higher high (Oct-Sep) may seem bullish, but this pattern and past experience suggest that buying VAY on an upside breakout is a risky proposition.
***Sectors I*** -- Basic materials, cyclicals, industrials and tech are the strongest sectors and have performed the best over the last few months. Conversely, telecom, pharmaceutical and utilities are the weakest sectors and have underperformed the overall market over the last few weeks. That is recent history, but what about the future? The 5-6 month run in the top four sectors has been remarkable. However, these sectors are looking mighty overbought and vulnerable to a correction. At this point, jumping on to the bandwagon does not carry a good reward/risk ratio and it seems prudent to look elsewhere. As noted over the last few weeks, financials appear the most vulnerable to a set back. XLF and RKH have yet to actually breakdown, but have underperformed the S&P 500 over the last few weeks. XLF formed a large symmetrical triangle and advanced to the upper trendline this week. Whereas the Dow and S&P 500 already broke out, XLF may be forming a lower high. RKH has a similar pattern working and may be forming a lower high. A move below 112 would be the early signal of a breakdown. Financials are key to the S&P 500 and a breakdown in this sector would bode most ill.
***Sectors II*** -- The Healthcare SPDR (XLV) traced out a corrective pattern over the last few weeks, but has yet to turn the corner. After breaking above its Nov-02 highs in June, XLV retraced 62% with a falling wedge. The stock broke above the upper trendline with a strong move on Tuesday, but has yet to forge a higher high or a higher low to complete a trend change. Pharmaceuticals are considered defensive and interest in this group is unlikely to pick up until there is a setback in tech and/or rotation out of financials. Indicators show promise, but remain mixed. 15-day RSI did not form a bullish divergence and remains below 50 (no breakout yet). The Accumulation Distribution Line and OBV turned positive as both moved above the their August reaction highs. And finally, relative to the S&P 500, XLV has underperformed since Oct-02. Funny enough, that was when the Nasdaqs bottomed and the tech rally began. (back to top)
***Sectors III*** -- The Telecom HOLDR (TTH) is definitely down, but not out just yet. The stock broke above the Mar-00 (yes, the March 2000) trendline with a strong advance from late April to early July. The decline retraced 50% of the prior advance and found support around 25 in mid July. TTH has basically consolidated over the last 5-6 weeks with support at 25 and resistance at 26.5.August volume was unusually high with most of these above average days showing a gain. A high volume bullish engulfing formed on 26-Aug and the gap up on 3-Sept would appear to confirm this pattern. However, resistance at 26.5 looks formidable and it would take a break above this level to clearly signal a resumption of the prior advance.
***Breadth*** -- The Thrust Oscillator (TO) was introduced in 1-Aug Weekly Report. This indicator works just like the TRIN as it measures the strength of advance and declining volume against advance and decline issues. As a volume-centric indicator, it will be partial to large-caps and work well with the Nasdaq 100 and S&P 500. The TO fluctuates between –1 and 1, with 0 as the centerline. The NYSE TO shows a breakout on 12-Aug and the index has moved sharply higher over the last few weeks. A bullish divergence foreshadowed the March low (green arrow) and a bearish divergence foreshadowed the June high (red arrow). The August low corresponded with the TO low. As long as the TO holds above the green trendline and prior reaction low, a sustainable decline is highly unlikely. The Nasdaq TO did not produce the March bullish divergence or the June bearish divergence, but instead produced an even larger bearish divergence in June and July. This bearish divergence failed to forecast a breakdown and the index moved to new reaction high in Aug/Sep. The TO broke out in mid August and remains in bull mode. As long as the lower trendline and August low hold, a sustainable decline is highly unlikely.
full text and graphics at the link
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