3 Technical Battles to Watch This Week
What happens when stocks and optimism rise in tandem?
by Todd Salamone 5/18/2013 10:02:08 AM
U.S. stocks continued to barrel higher last week, with both the Dow and S&P 500 notching record peaks and extending their weekly winning streaks to four. However, as Todd Salamone notes, various benchmarks are battling key levels right now, which could hint at a bout of profit-taking on the horizon. In addition, Rocky White offers a history lesson on when stocks and optimism rise in tandem, and why the current sentiment backdrop could be cause for concern.
- Why the lows of 2009 matter now
- How small-cap stocks are faring against their big-cap rivals
- Are we on pace to repeat 1995 -- or 1987?
Finally, we close with a preview of the major economic and earnings events for the week ahead, plus a featured sector to watch.
Notes from the Trading Desk: Millennium Marks and Round-Number Percentage Gains
By Todd Salamone, Senior V.P. of Research
"The next big area of potential resistance on the RUT is the 1,000 mark, as this would be the first test of this millennium level in its history. Long-time readers of Monday Morning Outlook know the significance of the 1,000 mark on the MID in its first attempts to cross this threshold in 2011-2012."
- Monday Morning Outlook, May 4, 2013 "If the equities market displays similar price action to that of early February, there could be additional upside during the next couple of weeks, despite the perception of it being overbought and primed to correct."
- Monday Morning Outlook, May 11, 2013 "Good Luck Shorting This Market."
- The Wall Street Journal "Morning MoneyBeat," May 17, 2013 Earlier this month, with the Russell 2000 Index (RUT - 996.28) at 954.42, we stated that the next potential area of major resistance would be in the 1,000 region. Only two weeks after this observation, the RUT has advanced more than 4% to an area just below this millennium mark -- tagging a new all-time intraday high of 996.47 in Friday's trading. With the RUT 1,000 coming into play amid an impressive rally, a potential speed bump lies just ahead. This sets up a battle between momentum players and profit seekers around a millennium number that is being tested for the first time in the RUT's history.
RUT – 1,000 is well in sight
Coincidentally, as the RUT digs in to do battle with the 1,000 area, the S&P 500 Index (SPX - 1,667.47) and S&P MidCap 400 Index (MID - 1,211.54) have some work to do around the round-number percentage gains from their respective 2009 lows. For example, at 1,667, the SPX is 150% above the 2009 low of 666.79. The good news is that this level does not coincide with a round number, as it did when the SPX at 1,000 marked a 50% advance from the 2009 low. Looking at the first chart below, this proved to be a month-long speed bump from August-September 2009. However, as evidenced in the second chart, the SPX double off its 2009 low was in the 1,330-1,340 area -- neither a round number nor a century mark. After moving up to this zone in February 2011, it wasn't cleared on a noteworthy basis until one year later, but still came back into play several times even after the breakout.
Two other points of reference with respect to key benchmarks trading 150% above 2009 lows -- and the potential implications for the SPX at present -- include:
- The 855 area on the RUT is 150% above its 2009 low of 342.59. It was first tested in April 2011, but it wasn't until January 2013 that it was successfully cleared.
- The MID at 1,000 is 150% above its 2009 low of 397.97. This level was initially challenged in April 2011, and, again, it wasn't until January 2013 that a major move above this area took place. As we have mentioned in previous weeks, the MID is currently doing battle with the 1,200 area, which is roughly 200% above its 2009 low.
So, as we enter next week's trading, as well as the second half of May, various benchmarks are taking aim at both round-number levels and round-number percentage gains above their respective 2009 lows. This may inspire profit-taking or, at least, hesitancy among the bulls. In summation:
- The RUT is staring up at the 1,000 millennium mark for the first time ever.
- The SPX's 1,665 level is 150% above its 2009 low.
- The MID is trading around 1,200 -- triple its 2009 low, and a potentially important round number given that the SPX and RUT are facing potential resistance, too.
The round numbers come into play as equity option buyers have pushed the 10-day average put/call volume ratio down to 0.52, indicating a hint of optimism among speculative traders. The last two times this ratio hit 0.50 were mid-December 2012 -- which preceded a slight pullback -- and late-March -- which preceded a consolidation and slight drift lower. Note on the chart below, though, that such price behavior quickly changes the sentiment landscape among this group. With many traders still convinced that we are due for a correction, this ratio will quickly pop once the market experiences an innocent pullback. In other words, the spikes in the ratio prove to be excellent buying opportunities.
Obviously, momentum can beget more momentum, and the technical backdrop suggests that while we could be in for sideways movement, or a slight pullback as round-number levels and percentage gains come into play, the sentiment backdrop continues to suggest upside potential. For example, despite a lot being made in the media about short covering and shorting being a tough game in this market, we find it of great interest that short interest on S&P component names is still up 8.1% year-over-year, 4.6% higher year-to-date, and down less than 1% from the last reporting period. This is encouraging for the bulls, even though possible speed bumps may be on the horizon.
Indicator of the Week: Comparing 2013 and Other Strong Years
By Rocky White, Senior Quantitative Analyst
Foreword: There have been a lot of comparisons of this year to 1995. The main reason for the comparison: The very impressive return so far this year is similar to the return in 1995 at this time. As you might've guessed, 1995 was an outstanding year for stocks. The S&P 500 Index (SPX) basically marched steadily higher from January all the way through December. Is that wishful thinking for the rest of the year?
The chart below shows the return so far this year, as well as entire-year returns for four other years that had equally impressive returns through mid-May. As you can see, it didn't always go as smoothly as 1995. This week, I'll take a look at some other pieces of data to see if this year is similar to 1995 in other ways besides simply price action.
Small-Caps vs. Big-Caps: The chart below shows how small-cap stocks performed against bigger-cap stocks throughout the course of the years mentioned above. Specifically, it shows the relative strength of the small-cap Russell 2000 Index (RUT) versus the S&P 500 (Note: I'm missing 1983, since our database has RUT data only since 1986). Basically, a level below 1.0 means big-caps outperformed small-caps. It is generally accepted that in a strong market, small-caps outperform, and in weak markets they underperform. However, in the strong years of 1995 and 1998, big-cap stocks significantly outperformed small-cap stocks using this measure. So far this year, small-caps and big-caps have similar returns.
Investors Intelligence: We put a lot of emphasis on sentiment at Schaeffer's, so the chart below is especially interesting to us, as it could be cause for concern. The chart shows the percentage of respondents in the weekly Investors Intelligence poll that call themselves "bullish" on the market. A high percentage of bulls means there's a lot of optimism from the retail crowd, which we consider to have bearish implications.
By this measure, we would say 1995 looks a lot more attractive than now. In 1995, despite the market being up about 15% in mid-May, only about 45% of those polled reported they were bullish. Throughout that entire year, the percentage never reached 50%. The fact that optimism was tame was a signal that money sat on the sidelines ready to come into the market and fuel more gains.
The latest poll by Investors Intelligence showed 54% of investors are bullish. This is the highest percentage of any of the years shown on the chart at this point in the year. When optimism reaches an extreme, it can make the market vulnerable to big declines. The chart shows that in 1987, the percentage reached above 60% -- and we know what happened later in that year.
Meanwhile, 1998 was a very good year for the market, even as the percentage of bulls rose to a very high level. There were still gains to be made after that, but it wasn't too long afterwards that the tech bubble popped. Some optimism is expected to be seen in sentiment polls during rallies, but we'd be more confident in the sustainability of this rally if the percentage of bulls was closer to the levels seen in 1995.
This Week's Key Events: The Fed, Retail Earnings In the Spotlight
Schaeffer's Editorial Staff
Here is a brief list of some key market events scheduled for the upcoming week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
Monday
- There are no major economic reports slated for Monday. Scheduled to announce their quarterly earnings are TiVo (TIVO), Qihoo 360 Technology (QIHU), Campbell Soup (CPB), and JA Solar (JASO).
Tuesday
- No notable economic reports are scheduled for Tuesday. Wall Street can expect quarterly earnings reports from The Home Depot (HD), Best Buy (BBY), NetApp (NTAP), Analog Devices (ADI), AutoZone (AZO), Compuware (CPWR), Dick's Sporting Goods (DKS), Intuit (INTU), Red Robin Gourmet Burgers (RRGB), Saks (SKS), and The TJX Companies (TJX).
Wednesday
- The regularly scheduled crude inventories report is on the docket for Wednesday, as is the existing-home sales report. Additionally, the central bank will be in focus, with Federal Reserve Chairman Ben Bernanke set to testify before Congress in the morning, and the minutes from the latest FOMC meeting slated for release in the afternoon. Stepping up to the earnings plate are Hewlett-Packard (HPQ), Staples (SPLS), Target (TGT), American Eagle Outfitters (AEO), Diana Shipping (DSX), L Brands (LTD), Lowe's Companies (LOW), Pacific Sunwear of California (PSUN), PetSmart (PETM), Toll Brothers (TOL), and Zale (ZLC).
Thursday
- Weekly jobless claims, the Federal Housing Finance Agency (FHFA) house price index, monthly new home sales, and the flash purchasing managers index (PMI) all come out Thursday. Reporting in the earnings confessional are Pandora Media (P), Marvell Technology Group (MRVL), Salesforce.com (CRM), Advance Auto Parts (AAP), Aeropostale (ARO), Bon-Ton stores (BONT), The Buckle (BKE), Children's Place (PLCE), Dollar Tree (DLTR), GameStop (GME), Hormel Foods (HRL), Ralph Lauren (RL), Ross Stores (ROST), The Gap (GPS), Sears Holdings (SHLD), Ship Finance International (SFL), Williams-Sonoma (WSM), and Zumiez (ZUMZ).
Friday
- The week closes out with durable goods data and reports from Abercrombie & Fitch (ANF) and Foot Locker (FL).
And now a sector of note...
Airlines
Bullish
Despite the strong price action of airline stocks, they fly relatively under the radar. In fact, the combined market cap of the four top domestic airlines -- Delta Air Lines (DAL), Southwest Airlines (LUV), United Continental (UAL), and US Airways Group (LCC) -- is just $41 billion. By means of comparison, Facebook's (FB) market cap is nearly $64 billion. Technically, the NYSE Arca Airline Index (XAL) is up more than 29% year-to-date, easily besting a gain of 16.8% for the S&P 500 Index (SPX). XAL recently bounced from a test of its 40-day moving average, which has served as a key layer of support since the second half of 2012. On May 15, XAL tagged a new multi-year high of $58.82, extending its breakout above congestion at the $56 level. However, it should be noted that the $59-$60 area could translate into a challenge for the index. This level marked XAL's highest monthly close in 2007 -- before the shares embarked on a serious drop into 2009 -- and represents double the index's 2011 low, hit after a year-long decline. Drilling down to the individual stock level, 100% of the 18 names we track in the aerospace/airlines sector are trading north of their respective 200-day moving averages, but just 57% of all analyst ratings across the group are "buys" -- down slightly from 59% 12 months ago. Also, short interest across the sector has risen by nearly 10% in the past year, and the average short-to-float ratio among these stocks is 6%. Should airlines continue to soar up the charts, a gradual shift in sentiment toward the bullish camp could result in contrarian tailwinds.
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