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(In addition, several energy-related ETFs are now in PAF “sell” signals.) Most ominous is the action in the Dow Transports where practically all of its components are in bearish technical patterns. As of Wednesday evening, 18 of 20 Dow Transports are below their 10-week moving average, and 15 of 20 are below their 40-week moving average. With the Dow Jones Industrial Average and the S&P 500 rallying in suspect volume during August and nearing their multi year highs, the bearish action of the transports seems to cast doubt upon the validity and sustainability of the current US stock market rally. While this doubt is cast, it is important that the longer term UP trendline of the Dow Transports is still intact and deserves respect. Similarly, the UP trendline in the relative strength line between the Dow Transports and the S&P 500 is still intact. Both of these trendlines are in the process of being approached and the behavior of the transports near these trendlines is important since it has implications for the broader stock market.
The Industrials Select ETF is in a similar technical predicament as the Dow Transports.
The recent market leadership shown in such sectors as consumer staples, dividend paying stocks, and the Dow Jones Industrials seems to paint a market that has recently become more defensive. This also shows in relative weakness in the Nasdaq 100 and the more speculative stocks and indices, such as small cap “growth” stocks. Yahoo Finance describes the PowerShares ValueLine Timeliness Select ETF portfolio as follows: “Seeks investment results that correspond generally to the price and yield, before fees and expenses, of the Value Line Timeliness Select Index. The fund will normally invest at least 80% of its assets in common stocks of companies that have the potential to outperform the U.S. equity market. It will normally invest at least 90% of its assets in common stocks that comprise the Value Line Timeliness Select Index. The index represents the 50 highest ranking common stocks for timeliness and safety based on proprietary investment methodology.” These fund descriptions tend to be too wordy. If I may take a moment to put the philosophy into my own street terms: “Seeks hot stocks.”
The performance of this “timeliness” fund, as indicated in the daily candlestick chart, suggests that what “has worked” is no longer working. The market has moved from an aggressive to a defensive posture. The “timeliness” ETF is in a downtrend and has recently formed a triangular pattern. This is probably a continuation pattern that will soon continue the downtrend which began this May. Today’s Market After a rally, gold dropped about $16/oz today and silver was hammered by $0.42/oz. As a result, precious metals continued their intermediate term squiggly action and confirmed continuation of the current corrective pattern against the long term uptrend. The preponderance of evidence presented in this space 2 weeks ago suggests that this correction will continue for a time frame measured in weeks before the next wave up begins. Here is an important ratio relationship where a trendline is being challenged; that is the relationship between commodities (as measured by the CRB index) and the 30-year bond price. As you can see after a secular downtrend that ended in late 2001, this long term relationship has been consistent and linearly upward since. Recently the bond market (denominator) has rallied, while commodities (numerator) have fallen. The ratio line now sits practically on the trendline where any continuation of the current intermediate term pattern (bonds up, commodities down) will result in the breaking of a secular trend. Still it’s never easy – this relationship was whip sawed in late spring of 2003 and of course, it could happen again. Yet, this is a relationship that is important. Let’s see if this trendline holds.
In a day where stocks were distributed for the second straight day as professionals returned from Labor Day vacation, the transports, which were up 0.11%, seemed to have respected the long term up trendline. The transports were one of the few sectors that finished up as breadth was poor. The industrials ETF (XLI) also outperformed the general market as it was down only marginally (0.25% versus the S&P 500 down 0.5%). Notable action occurred in the homebuilder sector where most homebuilders were up marginally, but on extremely high trading volume and a backdrop of bad news. It’s the extremely high trading volume that makes me scratch my head. This is a sector that is beginning to look like the next General Motors. That is to say, it is going up for no apparent reason. Oh, a couple of weeks ago, Barron’s suggested on the cover that “stocks in the sector are falling to attractive levels.” Yea, right! It’s that kind of market, and traders and investors need to get over it! Have a great evening. Martin Goldberg
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