MARKET GAUGE: Confirmed Uptrend
*Weekly Sector Watch highlights several industry groups that have experienced a measurable change in strength or weakness relative to other groups over the last 3-6 week period.
SECTORS EXHIBITING RECENT STRENGTH: Oil/Gas (US Exploration/Production), Oil/Gas (International Exploration), Oil/Gas (Refining/Marketing), Oil/Gas (Machinery/Equipment), Transportation (Air Freight), Transportation (Rail), Steel (Specialty Alloys), Metals (Proc./Fabrication), Retail (Specialty), Software (Medical).
SECTORS EXHIBITING RECENT WEAKNESS: Computer (Data Storage), Computer (Networking), Internet Content, Transportation (Airline), Finance (Specialty Services), Finance (Mortgage Related), Finance (Foreign Banks), Telecom (Wireless), Agricultural Operations, Utilities (Electric).
OVERVIEW: After posting solid gains last week the indices mainly treaded water this week with the exception being the small caps as they continued their leadership registering a third straight week of gains. Technology shares took a breather hurt by some late week weakness in some semiconductor names, while the energy sector continued to plow ahead with a weekly gain of over 2%. Basic Materials, Healthcare and Consumer Cyclicals also turned in solid performances for the week. While new highs in the small cap sector are good to see, larger cap names continue to lag which continues to be a slight concern for us. Additionally, we would like to see the Russell 2000 pull ahead further building on last weeks breakout. A failed breakout that returns the index back into its base could be a huge negative for the markets. As usual there are many issues overhanging the markets such as as rising interest rates, higher commodity prices, a higher US Dollar and the usual geopolitical issues. It’s impossible to forecast with any accuracy how these issues will effect the indices going forward, if you find someone who claims they can, run away fast, if we all knew with certainty there would be no market. So, rather than fretting about all the recent concerns that float around from day to day, we will do what we always do and monitor the indices for any clues to possible changes in character and let the action of the stocks in our portfolio be the ultimate barometer for our trading. With that, let’s get right to our charts of the four major indices we monitor here in preparation for next week.
SPY- After gains of over 2.5% last week, this ETF that we like to use to monitor the S&P 500 traded lower by 0.52% this week. After taking a big hit on Tuesday that sent the index back below the April highs that were mounted recently, it was able to rally back above that level on Wednesday before barely being able to hold onto that level at the close on Friday. Although Fridays selling was fairly muted, the index did technically pick up a distribution day making for a seventh day of institutional selling over the last 22 sessions. While five to seven distribution days over the course of the previous 20-25 trading days is normally a cause for concern, we always preach about keeping things in perspective. In this case we will consider that the May options expiration added to volume levels on Friday. Additionally, the loss for the index of 0.25% was just above the cutoff for a distribution day, and with the index holding above its 50 day moving average, we will keep from getting too negative about what saw from the S&P 500 in terms of distribution. While we have used the $271 level, as well as the 50 day EMA on the index is our most recent measure of progress, markets are never obligated to clearly hold or break support and resistance levels or provide traders with picture perfect trends. The real possibility of further choppiness that vacillates across all areas of support on our charts is something we always must consider as traders.
NASDAQ- The Nasdaq Composite continues to work through a nearly four month basing pattern and was able to finish the week modestly above the most recent resistance level near 7320. On Monday the index ran higher and nearly covered the gap that was left in mid-March when the index headed south shortly after reaching all-time highs. This area, near 7460 will present the first obstacle should the index try and continue its recent advance. The Nasdaq has looked better than the S&P 500 from a technical perspective while sitting much closer to its all-time highs, but the index did pick up a distribution day on Friday marking the fourth in the last 22 sessions, however, the 4/19 day will come off the books mid-week next week. Semiconductor stocks, which in part aided the recent recovery in the index, came under pressure late in the week. Chip stocks have now become a large part of the economy and helped throw the market into a correction earlier in the year so it will be interesting to see if more weakness in this area puts lasting pressure on the index once again, or if some other sectors pick up the slack.
QQQ- The Nasdaq 100 is a mirror image of the Composite. The index was able to escape a distribution day on Friday and finished the week by holding above its prior resistance level near $167.00. She sits with five distribution days in the current count but will lose the 4/19 and 4/20 sessions by late next week due to time. Looking at the volume pane below we can see that participation on up days over the last two weeks while the index rallied has been lackluster so it would be a welcome sight to see the index fire off some nice gains in the coming days on increasing volume. Without some heavier participation to the upside the most recent rally attempt may not have any staying power.
IWM- The Russell 2000 remains the beacon of light for the markets. The index has now seen gains in 10 of the last 11 sessions which has pushed it into all-time high territory. The index seems healthy from a distribution aspect as it has not seen a day of net selling by institutions since 4/24 and sits with only two distribution days on the books. We feel at this point that it may be key for the small cap index to pull away and add to its recent breakout. A failure here that throws the index convincingly back into its base may have ripple effect across the other indices, however with the index up nearly 7% from its lows on May 1st, a retest of the breakout area near $160.00 may be in the cards.
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