Happy Cinco de Mayo! I’m sorry this is post is up late today, I had a BBQ competition this weekend and didn’t get home until late last night and was pretty exhausted. Although our team did do well with a 2nd place in brisket and 10th overall out of 43 teams. While I wasn’t watching the markets on Friday it seems the bearish seasonality that begins with May is starting to take hold. The Dow Industrial continues to have problems breaking above the January and April highs.
Equity Trend
The S&P 500 ($SPX) is still struggling to break back above its January high. The sideways action over the last four months has taken place while not having a severe impact on the overall trend of the equity market. On any further weakness we look for potential support at the 100-day Moving Average and the rising trend line off previous lows.
Equity Breadth
While the NYSE Common-Stock Only Advance-Decline Line (not shown) has yet to set a higher high, the overall NYSE A-D Line has. The two up trends in our breadth indicators are still in place with the Percentage of Stocks Above Their 200-Day Moving Averages attempting to hold above 70%. As I’ve written the last few weeks, breadth remains bullish – and will be so until we see significant damage, most importantly, to the A-D Line.
Equity Momentum
We didn’t see much change on the momentum landscape for stocks last week. The divergence that’s been taking place in the Relative Strength Index (RSI) and the MACD are still present. The RSI has been able to stay above 50 recently after we got a touch of the trend line back in early April.
Since the RSI indicator has been unable to get back above 70 in the last four months, we are now watching to see if support gets broken on future weakness. If this momentum indicator gets down to 30 and is unable to break back above the 55/60 area on a bounce then we will likely be seeing a transition to a bearish range. Up until now we’ve seen a bounce in the RSI around the 35/40 level and we must allow the market to be ‘innocent until proven guilty’ as we are patient until a break actual occurs.
Corn
In last week’s Technical Market Outlook I discussed the chart setup for Coffee ($KC_F) and the divergence and trend lines that I was watching. This week I want to look at another commodity – Corn ($ZC_F). Like Coffee, we have a negative divergence taking place in the Relative Strength Index as it makes lower highs and the price of corn has been making higher highs. Looking at the trend off the January low, we saw the price of corn break through to the downside as the price of corn broke $5 (shown as $500 on the chart below).
This morning (Monday) we are seeing some strength in the corn market, which means we can begin looking if this trend line that was once support becomes resistance. In the dip last April we saw the RSI indicator bounce on the 50 level, we are just a few points below that now but if we do see strength come back to the corn pits then a bounce in momentum around here would make sense.
Looking at the seasonal patterns for corn, we have historically not see a high until mid- to -late June. So seasonal strength still favors the bulls but not for much longer.
Consumer Staples vs. S&P 500
In March I wrote a post called Are Consumer Staples Preparing to Warn Us Of Trouble Ahead? And I took a look at the Relative Strength Index for the ratio between the S&P 500 ($SPY) and the Consumer Staples Sector ($XLP). I go into more detail about this relationship and its historical implications on the weekly chart for the equity market in the post. But what I highlighted was that when a divergence has developed from the RSI indicator for the ratio between these two ETFs its led to protracted down periods in the market. In March we began seeing the first step in the divergence, the momentum indicator breaking into ‘overbought’ status. Now, we have more data and the divergence has in fact been created as the chart below shows.
While the S&P 500 ($SPX) has been trying to set a new high and has now tested its most recent weekly closing high, the RSI indicator for SPY:XLP has fallen fairly rapidly. We barely saw any form of a lower highs as momentum cut right through the mid-point of its scale. The last two times we saw this occur was in 2011 before the near-bear market and in 2007 before the financial crisis. This type of divergence was also seen in 2000 and 2004. This does not bode well for equity bulls and is something we can not simply ignore.
60-Minute S&P 500
The short-term resistance at 1885 that we discussed last week appears to still be holding as buyers have not been strong enough to push the S&P higher. We also now have a negative divergence in momentum developing with both the Relative Strength Index and the MACD having made lower highs as price bumped up against resistance. If selling pressure increases then we may see a test of the rising trend line off the two April lows. On the upside, we are still watching for a break of resistance around 1885.
Last Week’s Sector Performance
I believe (but could be wrong) this is the first time in 2014 that we’ve seen the Utilities ($XLU) sector the worst relative performer at the end of a week. The below chart shows the relative performance of each of the nine S&P sectors compared to the overall S&P 500 index. Last week we saw the previously weak sectors, Technology ($XLK) and Consumer Discretionary ($XLY) come out on top with Utilities and Energy ($XLE) the worst performing sectors for the week.
Year-to-Date Sector Performance
While Utilities and Energy were under-performers last week, it was not enough to knock them out as the top two best performing sectors for the year. Consumer Discretionary, Financials ($XLF) and Industrials ($XLI) are now the only three sectors still under-performing the overall market.
Major Events This Week
After last week’s packed economic calendar we have a lighter set of announcements this week. Below is a list of the economic data sets that will be released this week that I’ll be keeping an eye out for.
Monday: ISM Non-Manufacturing Index
Tuesday: None
Wednesday: Consumer Credit
Thursday: Jobless Claims
Friday: JOLTS
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. Connect with Andrew on Google+, Twitter, and StockTwits.
