Our Dow Theory indicator has turned more positive as Transports surged last week and remain 4% off their 2008 high. We like to see the Dow Industrials and Transports move consistently to lend support to the uptrend. See the chart below:
VIX remains low at 15.7, matching the lows reached in late 2007 through May 2008 (and, more recently, April 2010). Low volatility has introduced bargain prices on options; those seeking protection can purchase cheap puts, while those joining the bullish camp can find inexpensive calls (many in-the-money calls sell for barely any premium over intrinsic value). The gap in VIX price vs. its moving average, once again, is wide enough to suggest that a bit of caution is warranted for equity bulls. See below:
Our NYSE McClellan Oscillator closed positive on all counts last week, underscoring strength in advances vs. declines and the broad participation of most equities in this uptrend. See the chart below:
At this stage of the rally, one would expect laggards to start catching a bid. One such laggard has been the Staples sector, and there is no sign of catch-up from this group. Staples have been lagging Discretionaries, and this relationship was pronounced last week as the latter sector surged above its 16-day moving average and handily beat the sluggish Staples sector (food commodity inflation may be taking some toll on the group):
Underscoring the strength in the "risk-on" trade is the performance of our US Treasury/Copper Futures ratio, This ratio broke out to a new high (breaking resistance hit in 2006, 2007 and 2008). The COPPER/USB ratio underscores inflationary pressures. A rising Copper (or CRB) denotes inflation, while declining bonds (and corresponding higher interest rates) also support inflationary tendencies. The COPPER/USB ratio does a fine job confirming the trend in the equity markets (see the chart below with SPX plotted at the bottom):
Asian equities continue to take the heat and lag US equities. Tightening monetary policy through rising interest rates in many Asian countries is inducing fund outflows which are finding their way back into the US. Our EPP/SPX ratio (the iShares MSCI Pacific ex-Japan index vs. the S&P500) broke trendline support this week (as the dollar strengthened too), underscoring a shift in sentiment toward the US. See the chart below:
Prices of 30-year US Treasuries rose slightly on the week but continue to linger near a support shelf near 115. Testing support will be key and we will watch this behavior for signs of a reversal (and potential coincident decline in equities). At these levels, some allocation back into bonds may be a prudent move:
Other indicators remain positive. Our Corporate Bond/US Treasury ratio continues to support the uptrend in equities. Small Caps outperformed Large Caps, and Growth outperformed Value. Signs of these relationships changing will indicate an improvement in lagging sectors and will underscore an aging uptrend in equities.
Even in the historically weak month of February, dips appears to be bought as buying pressure remains. It is under these conditions that a surprise selloff triggered often by some unsuspecting event catches us off-guard. With options prices remaining inexpensive, it may be wise to protect one's equity portfolio with an index-based put (i.e. one-month SPY puts) as insurance.
Click here for all of the charts in our Market Tour on StockCharts.com.
No comments:
Post a Comment