The Homies Relax and Signal a Small Change
The Market
That was the first red Friday we’ve seen in nearly two months. Oh sure, it was barely red and it was touch and go but it does signal a small change in the pattern. There were some other pattern changes last week we should note.
First, we all saw interest rates fall (until Friday when they pushed back up) but what we did not see commensurate with that fall in rates was the small caps surge. On May 29th rates made a high (on the Ten Year) at 4.62 and fell all the way to 4.28% which is quite a move in a week and in that same time the Russell (IWM) lost a point. What we have typically seen is small caps react to rates the fastest and there was no reaction last week. Or at least not the standard reaction we have seen.
Then there are the homebuilders. Talk about a group that reacts to rates. The iShares US Home Construction ETF (ITB) made its high in late March; May showed us a lower high. Now look at the last week on the chart. Rates topped on May 29th and plunged. ITB had a tradable two day rally. That was it. And now ITB has notched just under the spring lows. Even after Friday’s rally in rates (the Ten Year is at 4.33%) ITB is now where it was in February.
Look at blue box A where rates bottomed (top panel) and the Homies topped. Makes sense, right? Blue box B is similar: as rates topped, the homebuilders rallied. Now look at green box C. That is a serious plunge in rates and there was no reaction at all in the Homies. Nothing.
Oh sure, maybe it is just a bit delayed. I mean we saw rates rise in February and the ITB rallied anyway but the yield on the Ten Year got back to where it was in March/April and ITB didn’t even get up to the mid May high.
Then there are the commodity plays. Again, the move in rates –until Friday—was massive and the SPDR Gold Shares undefined couldn’t even get to the prior high in mid May. Now it threatens to break a head and shoulders top.
I have not liked Copper for a while (the DSI got to 90 in mid May) and while the Global X Copper Miners ETF (COPX) hasn’t broken down yet, certainly that 44 level needs to be watched. But again, the move in rates last week barely shows on the chart.
The Russell is down 4% since mid May and I believe folks are still complacent. It is now below its 50 dma. I do think it ought to get a bounce off a gap fill around 200 but if I am wrong and it breaks that, like the change in the relationships mentioned above, that too will be a message that something has changed.
New Ideas
Another very minor change last week was Bristol Myers (BMY) did not make a lower low. I have been trying to bottom fish this name for the last few months with very little success. But I am willing to try again as long as it doesn’t break under that line.
Today’s Indicator
The ten-day moving average of stocks making new highs has been plunging since mid May. The Hi-Lo Indicator is at 44% so it’s well on its way to being oversold (under 20%).
Q&A/Reader’s Feedback
Baxter (BAX) is an interesting chart because the top it broke down from measures to the 32-33 area and that’s where it is. It also has support here from last fall’s lows. If you want to bottom fish this one I wouldn’t argue against it. This 32-33 area looks interesting to me although some patience might be required.
Oracle (ORCL) is an interesting chart. Short term it has trouble up here in the mid 120s but it broke out on a gap and retested the breakout. It has an unfulfilled target in the upper 130s. I would like to see it pullback as I have drawn in blue. Either that or it crosses that top line and then pulls back to the line.
If we step back and look at the weekly chart we see it has gone sideways for a year. And that pattern measures to 150-ish if it can breakout.
The question is where do we buy (TLT) back. This chart would say right around here. With the Fed meeting this week I’m more inclined to give it some time to settle down because it might still get back near 90.
