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John Murphy has been writing quite a bit lately about the out performance of the consumer staples stocks.  He is seeing a lot of traditional, slow-growth consumer staples breaking to new highs, and he doesn't like the implications for the market.   He sees sector rotation into the safety of the consumer staples as a sign that traditional growth stocks are weakening, indicating underlying weakness in the economy and the equity market.  He sees leadership in consumer staples as a bearish indication of weakness ahead for the stock market.

Below is a chart of the consumer staples versus the consumer discretionary.  A strong market is led by strong consumer spending and strong growth in consumer discretionary stocks, and the ratio line will point lower.  A weak market has weak consumer spending and rotation into staples, and the ratio line will point higher.  As you can see from the ratio line at the bottom of the chart, Murphy is correct that the Staples have been outperforming, and specifically since the end of February.  In addition, the discretionary index is relatively weak below the 50-day moving average, and the staples index is relatively strong and above the 50-day average.

Below is a step back from the daily chart with a look at the weekly.  The Staples showed superior performance during last summer's big correction, but then when that correction ended, the discretionary index took off and outperformed until four weeks ago.  In other words, this type of rotation occurs during an intermediate cycle correction and isn't necessarily a signal with a more serious implication.

At the moment, the weekly ratio line has only just started to turn higher, and is still under its 40-week moving average, and both the discretionary and staples indexes are still in an uptrend above their 40-week averages..  Also, the current bearish turn higher in the ratio looks like it is well within a trading range going back to 2004.  Although Murphy is right to point out this warning sign, it is too early to interpret it as more than part of a normal cycle correction.

Below is the daily intermarket chart.  The recent action shows bond prices headed lower pushing up rates, commodities trending higher and the US Dollar headed lower in a gradual but persistent trend.  All three of these markets are short-term negatives for the stock market, and these influences are shown in the stock market weakness since Feb-27.

Below is another step back from the day-to-day movement with a look at the weekly.  From this perspective, the intermarket doesn't look too bad for stocks, and, in fact, the recent stock market correction appears only minor.  Bond prices have been in a trading range with relatively low rates during the 3.5 years of this chart, and commodity prices are well below the level of a year ago, although showing a high consolidation that could break higher.

In general, this chart shows an intermarket that has so far supported higher stock prices, and this trend is currently intact.  But this is another important to chart watch similar to Murphy's ratio chart discussed above.  The one concern on this chart has to be the persistent trend lower for the dollar.  Initially, this trend lower may is a plus for the stocks as it implies relatively low short-term rates which is stimulative for the economy.  But it seems though at this rate of decline, the US Dollar weakness could soon be inflationary pushing commodities higher, long rates higher, and eventually stock prices lower.

Below is another chart we need to keep an eye on... the Shanghai stock market.  This is the market that sold off late February and triggered selling in all major stock markets.  It is currently showing a nice uptrend and at the moment is supporting higher equity prices.  But this is extended to say the least.  Another sharp correction seems likely and could pull the other markets down again. 

Below is a chart via John Murphy regarding the outperformance of the foreign stock markets versus the US stock market.  Although the US outperformed briefly in 2005 when the US Dollar perked up, the US has been the loser for years now.  Murphy sees this as a direct result of the weak US Dollar.  This chart says that we would have been better off holding the foreign stock indexes.   It also says that the US Dollar does matter to stock market investors.

All charts and comments intended for education and discussion purposes only. No investment recommendations are being offered. Comments below related to this post are encouraged. | MON - Sector Strength | TUE - Interest Rates | WED - Market Sentiment | THU - Commodities & Currencies | FRI - Market Breadth | SAT - Bullish Percents | About | contact: HeadlineCharts@gmail.com |

I received a comment questioning this rally due to the lack of volume.  I tend to agree, but I thought that volume was weak in January 2006 and again in June 2006.  Both times the market continued to be strong.  The OBV isn't that great either for the NYSE, but OBV is hitting new highs for the MID and SML indexes.  Since there are doubts and mixed signals about the rally when looking at volume, maybe the thing to do is switch to the weekly moving averages for a different view of the market.  The moving averages are a fairly objective way to evaluate the market, and based on the figure below the market looks healthy.  Most of the major indexes have now moved above the 10-week average while never breaking below the 40-week.  That's a pretty strong, broadbased up trend.

The NASDAQ continues to lag the market as it has for a number of years now with only a few brief periods of leadership such as last fall.  For now, it appears most of the funds are flowing into the NYSE and AMEX, and away from the NASDAQ.

The Dow Industrials are lagging the market again as it has for a number of years, similar to the NASDAQ.  The more economically sensitive Transports are holding up okay while the Utilities continue to dominate.  Generally a market isn't led by the Utilities, or the AMEX, but this bull market is different as funds have flowed in the stable, high-dividend Utilites and the energy-dominated AMEX.  I think the attraction to the Utilities is due to the low long-term bond rates that make their dividends more attractive, and the large energy component of the utilities particularly related to natural gas.  But also Utilities are probably very popular with the baby-boomers about to retire who want their retirement funds in equities but don't want the risk of most stocks.

The MID caps continue to be the outperformer and the SPX the laggard, although the SPX relative strength has now pulled back to a support level.  A break below this level would confirm the trend, but holding above might indicate an opportunity developing.

Kevin's Market Blog made the observation that steel stocks didn't really correct along with the market selloff starting Feb-27, showing the incredible, continuing strength of the index.  This seems very bullish for steel stocks and the world economy, although there is a divergence developing in the RSI compared to prices.  Note the outstanding long-term relative strength in the bottom indicator.

All charts and comments intended for education and discussion purposes only. No investment recommendations are being offered. Comments below related to this post are encouraged. | MON - Sector Strength | TUE - Interest Rates | WED - Market Sentiment | THU - Commodities & Currencies | FRI - Market Breadth | SAT - Bullish Percents | About | contact: HeadlineCharts@gmail.com |

The figure below shows that the major indexes all are still above the 40-week moving average, with a few still above the 10-week average, despite a selloff that is now 13 days old.  In other words, equities are taking a breather from their recent strong performance, and, at the moment, there are few signs that this short-term weakness in anything more than a pause in the larger uptrend.

Below is a chart of the relative strength of the major industries compared to the SPX.  Precious metals stocks have been weak due to the currency strength of the Yen, but as noted in prior posts, the XAU index remains in a healthy looking sideways consolidation.  Brokers have recently been weak, partly due to the mortgage scare, but also because of the large run up in prices in which a healthy correction was probably due.  Banks have held up well despite the mortgage-related headlines.  Semiconductors are also holding up well, and I believe this is an area to be researched while the markets are settling over the coming weeks.  Oil services have been the strongest relative performer, probably due to the sharp correction in oil prices since last spring, and the consolidation in the share prices. 

Industrials, Staples and Utilities are the relative outperformers among the major sectors compared to the SPX.  Rotation into the safer, dividend-paying stocks makes sense during an equity correction.  The weakness in Discretionary is to be expected but also is an area to watch.  If the market is going to find a bottom soon, this area of the market will need to firm up as well.  The weakness in Financials has already been noted, but it also is extremely important to the overall market.  John Murphy made a point last week that the key to the market probably lies with the performance of the Financials, and I think most people would agree.

Continued underperformance of the NASDAQ is shown below, while the heavily energy related AMEX is showing outperformance.  The NYSE shows strength as well despite the weakness in the financials which is largest weighting of that index.

It is nice to see the Transports showing decent relative performance in the chart below indicating underlying economic strength.  As expected the Utilities are strong performers partly due to the rotation into their safety and dividends, but also because long-rates have been moving lower and these are popular stocks for the baby boomers who are soon to start retiring.

The intermarket continues to show strength in long bonds, strength in commodities, weakness in the US Dollar, and an equities uptrend in correction mode.  In other words, lower rates contribute to a weaker US Dollar, which contributes to higher commodity prices.  And the higher commodity prices leads to strength in the commodity-related stocks such as Materials, Energy and Utilities (for their natural gas and energy-related components).  In my view, as long as the strength in commodity prices remains at a reasonable, gradual overall growth rate, it supports equities.  But if commodity prices accelerate, or if there is a spike in food, oil or gasoline prices, then higher commodity prices work against the overall equity market.

The weekly view is similar to the daily, although it shows commodity prices are still in a correction mode, but looking like a bottom is perhaps developing.

All charts and comments intended for education and discussion purposes only. No investment recommendations are being offered. Comments below related to this post are encouraged. | MON - Sector Strength | TUE - Interest Rates | WED - Market Sentiment | THU - Commodities & Currencies | FRI - Market Breadth | SAT - Bullish Percents | About | contact: HeadlineCharts@gmail.com |

In the chart below I'm attempting to track the overall health of the indexes.  In most corrections the indexes will break below the 40-week moving average, at least briefly, indicating oversold conditions from a weekly point of view.  So far, the correction hasn't taken a single index below the 40-week. 

The unwinding of the Yen carry trade was big news two weeks ago.  I didn't see much printed about it over the weekend so perhaps it has faded as an issue for now.  So far, the spike in the Yen doesn't look unusual to me.  Also, it wasn't clear to me if the surge in demand for Yen was a cause or the result of the selloff in equities.  But I think it is a really interesting story.

Below is shorter-term view of the Yen versus US equities.  The two do seem to move inversely as investors borrow Yen at low rates to invest.  It makes sense that when the investment is sold, there is a demand for Yen to pay off the loans.  I'm not sure why this situation would 'unwind' seeing as Japanese rates are so incredibly low.  Even if there are some Japanese rate increases it seems Japanese rates will be very low compared to other rates and the favorable carry trade would continue.

NASDAQ underperformance hasn't changed despite the bounce last fall.  The stronger companies on the NYSE with strong dividends and strong balance sheets continue to outperform.  The energy related shares on the AMEX also show strength.

Okay, so if investors prefer the NYSE stocks, why are the small and mid caps outperforming the large caps?  Not exactly sure but I think it is at least partly due to the relatively low short and long term rates.  Maybe we can look at that relationship tomorrow, but the bottom line is that the large caps aren't the leaders at the moment.  However, its worth noting is that the SPX:WLSH has reached a prior low.  This is worth watching because a break below would strongly confirm the SPX underperformance, but holding this level could be an important hint of change in the leadership.  As the bull market ages, I would really expect these large caps to become leaders. 

A classic looking head and shoulders pattern is shown below for the home builders.  The related real estate indexes are the mortgage financers and the real estate investment trusts which I hope to look at later in the week.  Housing has me worried as much as it does everyone else.  I mentioned yesterday that I'm letting the ECRI Cycle Research Institute handle the analysis of the broader economic implications of the meltdown in the subprime mortgage market.  But I still want to follow the story shown in the related charts.

Below is a chart of the sideways consolidaton pattern in the semiconductors.  Is this a pause in a downtrend for the semi's or a base building?  I'm not sure.  If I only had this chart, I wouldn't know there is a market correction in progress.  This isn't an industry I would expect to do well, but it is holding up nicely for now.

All charts and comments intended for education and discussion purposes only. No investment recommendations are being offered. Comments below related to this post are encouraged. | MON - Sector Strength | TUE - Interest Rates | WED - Market Sentiment | THU - Commodities & Currencies | FRI - Market Breadth | SAT - Bullish Percents | About | contact: HeadlineCharts@gmail.com |

So sorry to read that ZenTrader has decided to discontinue his blog.  It was a really good blog that I'll miss reading daily. 

A number of blogs and news reports have been discussing the Yen carry-trade issue where investors borrow Yen at very low rates and re-invest around the world at higher returns. The unwinding of this trade has some people worried that it will remove a major source of the world-wide liquidity that fuels housing and supports the equity indexes.  In fact, some people mentioned that it was the Japanese government that engineered this unwinding by intentionally allowing the value of the Yen to rise because they were concerned that it was going too far and creating a bubble condition.  Below is a chart of the Yen with the SPX in the background.  You can see an inverse relationship between the Yen and the US stock market, at least for the time shown in the chart.  The same thing happened last May in which the Yen rose sharply and the US market sold off.  The sell off in May was preceded by the rally in the Yen, and may be the result of the smart money selling off their US equity holdings and buying Yen to pay down their loans.  This is a really interesting story that I under-appreciated before last week, and plan to monitor in the future on Thursdays when currencies are reviewed.

One story that I think has been overshadowed by the other news is the sharp rise in gasoline prices.  The timing of this rise is very bad considering the shaky ground under the equity market.  The last thing we need right now is weak retail.

Below is a relative strength chart of the major US equity indexes for last week.  I don't see anything too surprising in the chart.  The weakness is in the indexes that contain the companies with the weakest balance sheets, the NASDAQ and the S&P 600 Small Caps.  Relative strength is shown in the stable companies found the Utilities, S&P 500 Large Caps.  A little surprising is that the NYSE showed weakness even though it generally has stronger companies.  However the OBV volume of the NYSE showed distribution prior to the sell off indicating underlying weakness.

Below is a chart of the absolute strength of the intermarket last week.  As expected, money flowed out of US stocks and commodities and into the safety of bonds.  It will be interesting to see how long this money flow lasts.  The lower long-term rates will eventually start to help the equities as it did last summer, and the lower commodity prices eventually help as well.

Below is a relative strength chart of the commodity groups compared to the old CRB index.  The current CRB is heavily energy weighted, so I used the CCI as a reference point.  As expected, industrial metals are weak because there is concern that equity sell off is pointing to economic weakness.  If there is economic weakness though, I would expect the energy commodities to sell off too, although oil is still trying to emerge from a price correction that began last spring.  So the froth is already out of oil prices.  The weakness in gold and silver is probably due to low inflation expectations due to possible lower growth levels.  I haven't been following the story regarding livestock, but it is probably due to the world-wide drought conditions and the impact on grains.

Below is a chart of the relative strength of the major US equity sectors.  I'm running out of time to comment, but, as expected, there is strength in defensive sectors and weakness in economically sensitive sectors.

Below is a chart of the relative strength of the major industries, and yikes, gold really took a hit.  There was no safe place to be last week but oil services and drugs were at least safer than the others.  I'm a little surprised by the strength in banks.  Perhaps they held up due to strong dividends and that they weren't already extended like some of the other areas.

All charts and comments intended for education and discussion purposes only. No investment recommendations are being offered. Comments below related to this post are encouraged. | MON - Sector Strength | TUE - Interest Rates | WED - Market Sentiment | THU - Commodities & Currencies | FRI - Market Breadth | SAT - Bullish Percents | About |

Below is one of the first charts I put up on this site last fall.  I didn't change any of the text.  I wish I had paid attention to my own chart.  Small caps took a well deserved break last year and are back in the driver's seat again.  I believe this is indicating some underlying economic strength.

Last week's post started by saying I would be watching this chart because indications were that it was going to break out.  Actually, I thought it might need some short-term consolidation because the market was short-term overbought.  I still think it is short-term overbought and we may see a restest to the break out point this week, but a break above the high of Jan-16 would certainly be favorable for the market.

Below is the short-term intermarket chart.  Bond prices retested their short-term break out point and look to be continuing the up trend.  Commodities certainly had a strong week confirming their short-term trend higher.  The dollar sagged a bit more confirming its failure at resistance since the beginning of the year.  And equities are in a relentless uptrend but with slowing momentum that everyone is watching.  Bottom line: bonds are supporting the overall market as rates move lower, commodities are supporting commodity-related stocks, the dollar is supporting commodities and probably supporting small caps as its points to a limit on short-term rates, and equities are confirming its own trend with higher highs and higher lows.

The NASDAQ has been performing well lately, but shown in the chart below this strength is so far well within a down trend. The NASDAQ has a lot to prove before it becomes a market leader.  At the moment, it looks like the NYSE and AMEX are taking a breather in favor of an oversold NASDAQ.

Nothing we don't already know shown below, but it is just that it shows it so well.  Large cap relative weakness, mid cap relative strength and small cap looking good. 

For February, materials and utilities are the big winners.  Utilities are so overbought based on the bullish percent it is hard to imagine there is a lot of opportunity, but you can't fight it.  Materials strength reflects the commodity strength and economic strength.

Strength in SOX is also a confirmation of economic strength, but also oversold conditions as it is attracting money as one of the few areas of opportunity left in the market.

All charts and comments intended for education and discussion purposes only. No investment recommendations are being offered. Comments below related to this post are encouraged. | MON - Sector Strength | TUE - Interest Rates | WED - Market Sentiment | THU - Commodities & Currencies | FRI - Market Breadth | SAT - Bullish Percents | About |

This is the chart I'll be watching this coming week.  If this is index is going to break out, it may need a few days of additional sideways consolidation because the market is a bit short-term overbought.

Below is a chart of the intermarket.  A lot of what follows is outlined in John Murphy's books on Intermarket Analysis, and this is my understanding of it.

Equities is the only market in a clear uptrend.  The direction of all three of the others is in some doubt.  Generally, it is believed that in the long run, a strong US Dollar helps US equities because it attracts foreign investors.  But this doesn't always hold true and this may be one of those periods.  A rising bond market should help equities as it pushes long rates downward.  Lower rates helps the economy and therefore equities, but that is until rates get too low and then it appears the bond market is anticipating economic weakness, and this hurts equities.  Rising commodities help equities at first because it indicates economic strength and it helps the commodity producing stocks such as oil companies.  But if commodities rise too far or too fast, it ignites inflation fears which hurts equities.  In other words, intermarket analysis is a slippery slope!

Below is the same intermarket chart but with a weekly 3.5 year view.  The direction of long bonds is unclear but the direction of commodities and the US Dollar is clearer.  In July 2006, bonds bottomed and moved higher pushing rates lower, helping equities.  At the same time, commodities topped out and broke down below the up trend line. This relieved enormous inflation fears, again helping equities. I'm not too sure about the impact the US Dollar had, but I'm inclined to believe that the weakness was helping equities although this is contrary to its traditional role where a weak dollar hurts equities.  US Dollar weakness does help foreign earnings of US companies so this may be what helped US equities.  But I'm more inclined to believe that US Dollar weakness predicts low future Fed Funds rates, and this is what is helping US equities.

To complete the picture, below is the intermarket with a 10-year monthly time period.  I drew the trend lines based on my own view of the direction of each market at the moment.  But as you can see, bonds, commodities and the US Dollar are all near the trend line so we are at a point where we could see a major trend line break.  Equities will likely be influenced by, as well as anticipate, these other markets rather than lead the others. 

I couldn't resist and put the 25-year monthly chart below.  The chart shows bonds and stocks started a gigantic bull market 1981, while commodities peaked that same year and started a huge multi-year decline.  The direction of the three markets reinforced one another with lower rates and lower commodity prices helping push equities higher.  The role of the US Dollar isn't really clear and the trend line I drew is definitely questionable, but I think the dollar was helping equities most of the time as it pointed to the huge fiscal stimulus of deficit spending combined with a friendly Fed.  It does look like the strength of the dollar in 1995 helped equities, and then the weakness in 2001 hurt equities, probably until equity prices were so low that the dollar was no longer a major influence.  Also, short-term rates were so low at that point that they were such a major stimulus to the economy that they trumped the influence of anything else.  The issue now for followers of the intermarket is what is the impact of commodities.  Since they were part of the major trend that started in 1981, and broke their trend in 2002, are they now working against bonds and stocks in the long run?