Sunday Night Recap: The Pause that Refreshes

I don’t know about any of you, but last week had to be one of the most boring since the end of the 2nd quarter. I know, you read here last week that the S&P 500 needed to take a pause to allow it’s nearly overbought conditions to stabilize but it’s so damn hard to get excited about hitting new highs every day when that involves an advance of about 4 points on the back of declining volume. In fact this week was one of the lightest since mid-September…right before everything went to heck. Behind all that snoozefest though, the S&P 500 saw a great deal of sector rotation that saw some of this year’s biggest winners lose ground.

Take a look at the sector table for a better look at this rotation:

SECAfter lagging in the October rally, telecoms finally began to gain ground while tech stocks and materials continued their recent momentum. On the laggard’s side of the column, we see the same names we talked about last week with healthcare underperforming the broader markets while financials and reit’s continue to get hung up over legal concerns and rising rates. The biggest loser this week were the utilities, with a weak sell-off on Tuesday turning serious on Wednesday and pushing XLU back into neutral territory and close to support around $44.50. How long will this weakness run for is another story.

xlu

xluspyIn fact, one of the big success stories for the week was that the gold miners managed to advance for two consecutive weeks for the first time since, well, I can’t remember when.  Partly on the back of stories about Russian gold hoarding and partly on a dollar that may be topping out, GDX is closing in on prior support at $20, let’s see if it can break above it and stay there before getting too excited about going long.

GDXUUPBut even with the sector rotation, breadth has remained noticeably unchanged. The % of stocks above their 200 day moving averages dropped slightly while those above the 50 day increased slightly on the change in sector leadership although that wasn’t enough to keep the new hi/lo indicator from continuing it’s divergence. What has it done? It’s allowed the recent momentum to cool off and give the market a fighting shot for another push higher.

spyHILOWhen the market closed on the 7th, the S&P’ short term momentum was in the 3rd percentile while longer term momentum scores were back to the 40th percentile. It doesn’t sound like much but on October 16th the short term scores were in the 99th percentile as were the 1,2, 3 year scores, about as weak as momentum has been for the S&P for a very long time. If we have advanced another 20 points from the 2031 close on the 7th, all of these scores would have been in the 1st percentile and setting the ground for a sustained pullback below 2000 to let the market cool off. For now, the most likely route for the SPY is a slow drift back down to $202.

ASHRThe real action for the week was overseas; and not in China where the A-share market continues to plow higher before the beginning of cross listings between Shanghai and Hong Kong. The Euro managed to gain a slight amount of ground against the U.S. dollar on….well it’s hard to tell what these days. Less bad GDP forecasts? Countries beating their incredibly low GDP forecasts? Who knows these days, but FXE has bounced off the lower boundary of its symmetrical triangle pattern indicating a more sustained bounce might be in the forecast. Meanwhile Eurozone stocks, represented by EZU, bounced higher and actually outperformed the S&P 500 on very light volume.

While a nice turn of events, EZU still has a long way to go before challenging its downtrend line or regaining some of the lost momentum versus the S&P.

FXE

ezu2Besides industrial production on Monday and the Fed minutes on Wednesday, it’s going to be another quiet week for the markets so use this opportunity wisely. Do your research, watch your charts and figure out just how long you want to be heading into Thanksgiving.

Good hunting!

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