Every once in a while, it's necessary to look in slightly unusual places to gain a better understanding of what the market is trying to do. Given our recent discussions on utility stocks and why equity bulls should be concerned by their overall out performance, I thought this would be an opportune time to review the ratio chart of the Russell 2000 iShares (IWM) against the S&P 500 SPDR (SPY).
If we use IWM to represent riskier small-cap stocks and the SPY to represent safer large-cap stocks, I think we can agree that seeing the IWM breakdown against the SPY is not a bullish development. In fact, look what happened to the S&P 500 (the bottom pane) the last time traders turned against the IWM in favor of the SPY. While I won't go so far as to say equity bulls should panic. I will suggest a heightened sense of concern is warranted.
Just because I want to give the bears a bit more to chew on, let's also review the ratio chart of the Energy Select Sector SPDR ETF (XLE) against the Financials Select Sector SPDR ETF (XLF). This is a simplistic way of examining how traders react when a traditionally late-cycle sector (XLE) begins to outperform an early-cycle sector (XLF). Similar to the IWM:SPY ratio chart above, it's easy to see that equity bulls would rather see the XLF outperforming the XLE and that is not what's currently happening.
The near-term story on the SPY is pretty simple. The bulls gain a serious tailwind above $188.65 and are sent back to the penalty box beneath $187.05. Day timeframe traders can review my notes on the chart below.
Shortly after 7 a.m., the CME-traded Gc gold contract was trading at $1,270. Fast forward a few hours and the contract was spiking toward $1,300. Rather than speculate on why buyers poured into the gold pits at that moment, let's focus on the fact that the contract advertised beneath its early-April lows was unable to pull additional supply into the market and quickly recovered. At least in the short term, traders have identified a price sellers feel is too cheap to do business.
While I'm not yet convinced the Gc contract won't simply rotate between $1,310 and $1,270 for a couple weeks (churning both longs and shorts toward a frustrating death), I do have a longer-term bullish view of both the metals and miners. A bit more basing will likely transform me from a day timeframe trader of gold, to a higher timeframe and more-committed participant. Suffice to say, a sustained break back beneath Thursday's early morning low would be a major negative for gold bulls.
Additional Notes:
- Following a moderately disappointing earnings report, shares of Peabody Energy (BTU) reversed higher on Thursday on much stronger than normal trading volume. Breakout buyers should remain focused on $18.25.
- Cliffs Natural Resources (CLF) still has a long way to go before it begins to look bullish. But Thursday's price action was constructive. Remember, as much as we'd like to see a sign of strength in shares of CLF, we're also looking for a general shift into late-cycle material names.
- The SPDR S&P Bank ETF (KBE), which is composed primarily of regional banks, thrifts and mortgage companies, was absolutely hammered on Thursday. As ugly as the collapse was, I don't expect to see too many commentators squawking about it unless it closes beneath $31.70-32.
- We have a number of major catalysts next week. In addition to an ongoing earnings season, there's a two-day Federal Open Market Committee (FOMC) meeting on Tuesday and Wednesday. The ADP employment data are released on Wednesday. And the all-important, but rarely accurate, employment report is released on Friday.
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at parkcityyeti@gmail.com or posted to my twitter feed @ByrneRWS
