Who Will Be the New Market Leaders?

Apr 11 2014, 1:55pm CDT | by

Carnage in the technology and biotechnology stocks continued on Thursday as the major averages erased all of Wednesday’s gains. Selling was heavy and there were some signs of panic liquidation. The ARMS Index closed at 2.37, which is just below the March 13 high of 2.48. At the February 3 low, the index closed at 3.42.

Those stocks that have borne the brunt of the selling show no signs yet of a bottom, while other stocks, both in the US, and overseas, do look much better. The Nasdaq Composite lost 3.10% Thursday and is now down 2.93% for the year. The Vanguard MSCI Europe (VGK) is actually up 1.3%, with the Vanguard MSCI Emerging Markets (VWO) up 0.7%.

Weak data out of China apparently contributed to the selling pressure, yet the Hang Seng Index is down just 0.66% for the year. The stock market bears are arguing that the global markets, as well as the large-cap US stocks, are going to soon join the Nasdaq 100 by dropping sharply.

After Thursday’s close, the McClellan oscillator closed at -168 and dropped below support, suggesting it will drop to more oversold levels. The NYSE A/D Line turned lower but is still above the April, as well as the late March, lows. Therefore, is does not yet show signs of a completed top (2 Stock Market Scenarios). Given the sharp declines in the Eurozone markets in early trading, the selling is clearly not over yet.

The economic data also continues to improve and that suggests to me that those who sold Thursday will be surprised by the economy’s strength later in the year. Though it may not be enough to justify the high levels that some momentum stocks reached in March, it is a positive sign for many of the large-cap stocks. A technical examination of the weekly charts of the SPDR Dow Industrials (DIA) and iShares Dow Transportation (IYT) continues to support a more positive long-term outlook.

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Chart Analysis: The weekly chart of the SPDR Dow Industrials (DIA) reveals that it is not that far now below the April 4 high of $166.06.

  • The 20-week EMA is now being tested with the quarterly pivot at $160.88.
  • The weekly starc- band is at $156 and the quarterly projected pivot support is at $156.25.
  • In February, the low was $153.12 with longer-term support at $150.20, line b.
  • The weekly relative performance may close the week above its WMA.
  • The daily RS line is well above its WMA and does appear to have completed its bottom.
  • This means that the DIA is starting to outperform the S&P 500.
  • The weekly OBV has turned down, but is still above its WMA, with longer-term support at line d.
  • The daily OBV (not shown) is negative.
  • There is first resistance now in the $163.50-$164.50 area.

The iShares DJ Transportation Average (IYT) was down over 2% on Thursday, closing just above the quarterly pivot at $132.63.

  • The 20-week EMA is at $130.93 with the weekly uptrend at $128.93.
  • The weekly starc- band is at $126.78 with more important chart support at $125, line f.
  • The weekly relative performance has formed lower lows, line g, but is still above its WMA.
  • There is more important support for the RS line at the February lows and the uptrend, line h, from last summer’s low.
  • The daily relative performance (not shown) is flat but still above its WMA.
  • Volume Thursday was the heaviest since March 13, but the weekly OBV is still above its WMA.
  • The OBV has more important support at line i.
  • The daily OBV is negative and has dropped below the February lows.
  • There is initial resistance at $134.20-$135 and then at $137.

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The long-term chart of the SPDR Dow Industrials (DIA) goes back to 1999 and includes the 40-week MA at $157.72.

  • The DIA staged a major upside breakout in March 2013 as resistance at $141.21 was overcome.
  • This is now a major level of support with the uptrend, line b, a bit higher at $142.71.
  • Below the chart, is the relative performance of the DIA versus the QQQ instead of the S&P 500.
  • At the 2000 top in the Nasdaq Composite and Nasdaq 100, the RS line started a strong uptrend. The DIA did better than the QQQ until the market low in 2002.
  • The RS line has been in a downtrend ever since, line d, but did spike in 2008.
  • The RS line is now above its 21-week WMA but still below its initial downtrend.

The daily chart shows that DIA is now below its 40-day MA with trend line support, line e, at $156.80.

  • The daily ratio of DIA versus QQQ completed its short-term bottom (see circle) in the latter part of March.
  • The relative performance is now on the verge of breaking its downtrend, line f.
  • The RS line is holding well above its rising WMA.

What it Means: The disappointing earnings from JPMorgan Chase & Co (JPM) has pushed the stock down almost 4% before the NY open. On the other hand, Wells Fargo & Company (WFC) beat estimates but is only up slightly in pre-opening trade. The US futures are down sharply.

The comparison of the DIA versus the QQQ suggests that once the current wave of selling is over, the large-cap Dow stocks are likely to be the best bet for new investments.

How to Profit: No new recommendation.


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