The Narrowing Stock Market Leadership

Before the release of Apple’s earnings I was nervous that the expectations were too high especially with the increased market volatility. The Dow Industrials ability to overcome the 22,000 level was due primarily to the strength of four stocks; Boeing (BA), Apple (AAPL), McDonald’s (MCD) and Caterpillar CAT).

It is a concern that the Dow Industrials, the least diversified of the most popular market averages, is leading the market higher. The gains have not yet been confirmed by the other major averages. In fact the Dow Transports at last week’s low was down 6.7% from its recent high.

The S&P 500 is a market weighted average where the performance is tied to the capitalization or the value of the companies. In contrast to the Spyder Trust (SPY) the Guggenheim S&P 500 Equal Weight ETF (RSP) gives an equal weight to all the stocks in the S&P 500. Both ETFs moved higher together until July 29th when RSP turned lower and the Spyder Trust (SPY) held firm. This trend continued last week.

In the past I have commented on the analysis of the % of stocks above the 50 day MA for the major averages. They are often used with other technical studies to confirm market bottoms. At the February 2016 low (The Week Ahead: Is There Blood In The Streets Yet?) it was one of the signs, along the more important A/D indicators, that suggested the market was bottoming.

When the 5 day MA of the % of S&P 500 stocks above their 50 day MA drops to one standard deviation below the mean and diverges from prices (point 1) it can be a sign that the market is sold out. There was a similar signal last fall, point 2, as the stock market was ready to turn higher. On the latest rally the 5 day MA has not been able to move to overbought territory as it has stalled below the resistance at line a. This is another sign that the S&P 500 advance has narrowed.

Since the 2016 low one of the strongest stock market groups has been the semiconductors. As this chart indicates that the iShares PHLX Semiconductor ETF (SOXX) has outperformed the Spyder Trust (SPY by over 40%. In last week’s article “Are The Semiconductor Stocks Topping?” I took a technical look at this key industry group.

In my recent review of recent August stock market corrections there were some common A/D line patterns which are currently not evident. The seasonal chart of the S&P 500 going back to the 1920s indicates that it typically tops out at the end of August and early September (line 1).

It is critical that the technical indicators be used as a trigger for the seasonal trends as there are many traders who have blown up their accounts when they followed seasonal trends without technical confirmation.

On the chart you will notice that for the second week in a row the S&P 500 formed a doji (point b). This is a sign of indecision as the S&P 500 gained just 0.2% last week while the Dow Industrials was up 1.2%. A weekly close below 2459.33 will trigger a weekly sell signal. Last August the S&P 500 also formed two dojis, point 2, and the selling picked up two weeks later.

Market Wrap

The Dow’s move above 22,000 will likely get most of the attention in the local press but it was one of the few bright spots. The strategist’s comments last week about a “bullet proof” market may be a common opinion of many average investors. The Dow’s gain of 1.2% last week may have reinforced this view.

The Dow Utilities were up 1.1% last week while the Transports rose 0.6% but the other major averages were lower. The small cap averages took the biggest hit with the Russell 2000 down 1.2%. The S&P 500 was just barely higher and the Nasdaq 100 was 0.1% lower. On the NYSE there were 1522 advancing stocks and 1546 declining. There was also a 1.3% gain in the financial stocks.

The weekly range of the Powershares QQQ Trust (QQQ) narrowed last week but it closed above the prior week’s doji low of $142.30. The quarterly pivot is at $139.26 with the rising 20 week EMA at $137.73. The weekly starc+ band is at $148.33 with the starc- band at $134.71.

The weekly Nasdaq100 A/D has declined slightly over the past two weeks but is well above its rising WMA. The daily A/D line (not shown) is slightly below its barely rising WMA but has not started a new downtrend.

The weekly OBV declined last week after forming a negative divergence (line a) at the July 21st high. It is still above the key support at line b and a drop below this level will confirm the divergence.

The Spyder Trust (SPY) was slightly higher Friday and volume did increase. The daily chart suggests that it may be ready to breakout of its recent trading range. The daily starc+ band is at $249.16 with the weekly at $251.59.

The daily S&P 500 A/D line made a marginal new high on Tuesday and has turned up from its WMA. This improvement could be reversed with a sharply lower close. The OBV has moved above its WMA which is an encouraging sign. The 20 day EMA is at $246.10 with stronger support at $244.60.

The iShares Russell 2000 (IWM) triggered a weekly doji sell signal last week and the daily Russell 2000 A/D line is now in a short term downtrend. The weekly A/D line is still above its WMA. The 20 day EMA is at $141.34 with the daily starc+ band at $143.39. The weekly relative performance has dropped below its WMA suggesting it is not a market leader.

What to do? The stock market was just one sharp down day away from moving into the corrective mode last week. The narrow nature of the advance cannot be ignored and I continue to be cautious about the stock market unless the market internals can get considerably stronger.

Therefore it is not a time to be aggressive on the long side of the market as Viper ETF traders are continuing to take profits on strength. There are a few special situation ETFs that look attractive from the long side for traders and our positions in the non-US ETFS are doing well.

If there is a correction it is not likely to change the major trend as a 3-4 week decline seems the most likely. If this is correct we should see more sector rotation and for investors I think the next good buying opportunity will be after a correction.

Viper Hot Stock traders have done pretty well in navigating our long positions around the earnings reports. We have taken some good profits on strength but have also been stopped out when bottom formations were aborted. We did establish a few short positions in tech stocks last week and will continue to reduce the exposure on the long side in case the market moves into the corrective mode.

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