After a very disappointing day on Tuesday (when the market dropped over 3% from its intraday highs), the stock market bounced-back quite nicely yesterday. The S&P 500 rallied 3.4% and finished on its highs of the day for the second time in three days this week. We do have to point out, however, that the internals were pretty mixed. The breadth was quite good…at 20 to 1 positive on the S&P 500, but volume was almost 20% lower than it was on Tuesday when the market saw its big downside reversal. Also, as one rather smart fellow pointed out to us, the most active names were chock full of the laggards…which had been beaten up so badly for so long that they didn’t have anywhere to go but up. (USO, UCO, CCL, F, MFA, GE, CHK, BAC, DAL.)
That said, it was still great to see that the S&P was able to break more meaningfully above its 200 week MA. As we highlighted yesterday, that was the most important resistance level we have been watching, so if it can hold above that line as we move through the month of April, it’s going to be bullish on the technical side of things. This will be especially true given that the SPX has made its first minor “higher-low/higher-high” sequence since the bear market began in February.
In fact, the same thing can be said about several other global stock markets…and about some of the key groups in the domestic stock market as well. For instance, South Korea’s KOSPI index, the Hang Seng index in Hong Kong and Germany’s DAX are have all made “higher-low/higher-highs.” Heck, even Italy’s FTSE MIB index is very close to making a higher-high after making a higher-low recently!
As for the domestic groups we just referred to, the XLK tech ETF, the XLF financial ETF, the XLV healthcare ETF, the XLE energy ETF, IYR real estate ETF, and the XLI industrial ETF have all made minor “higher-low/higher-highs” this week. Actually, there are two more…and we’d like to focus on these two this morning. They are the XRT retail ETF and the ITB home construction ETF. Needless to say, the U.S. economy is very dependent on the consumer and housing, so the action in these ETFs over the coming weeks is going to be very important.
In other words, it wouldn’t surprise us at all if the broad stock market gave back a little bit of this week’s gains today…in front of the three day weekend…but how these economically sensitive groups act over the next 6-8 weeks should be of particular importance for the longer-term potential of the stock market and the U.S. economy.
(One quick note. The XRT’s “higher-low” was a very small one. So you could actually call it a “double-bottom.” However, since a “double-bottom/higher-high” sequence is just as positive as a “higher-low/higher-high” one, we’ll keep using the “higher-low” term as we discuss this issue today.)
It’s great that these key sectors are starting to act well…and “higher-low/higher-highs” are always a good start. However, these two ETFs declined more than the broad market during the initial decline…with the XRT falling 42% and the ITB falling 52%. This made these two groups even more oversold than many other ones at the March lows.
What we’re trying to say is that the action over the next 6-8 weeks is going to go a long way towards telling us if the bounce we’re experiencing right now is just a bear market rally that will roll-back over and hit us hard again…or something that is going to be sustainable. We think the action in these two very economically sensitive groups should give us a clue about how things will playout.
Both the XRT and the ITB have retraced a much smaller percentage of their declines so far. (They’ve retraced about 25%-30%...vs. almost 50% for the S&P 500 index.) Therefore, if these two ETFs can follow their minor “higher-low/higher/high” sequences with some more significant upside follow-through…and start to play catch-up with the rest of the stock market, it’s going to be a very bullish sign for the U.S. markets and economy. However, if the roll-back over in any meaningful way, it’s going to raise the odds that we’ll see a retest (or even an undercut) of the March lows before we see the ultimate bottom for this bear market.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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