The stock market is in the traditionally bullish year end period in a year where seasonality is one of the most followed aspects of the market. Therefore, it would be caviler to take any significant bearish positions against such herd behavior. Still it is not difficult to find a few cracks that are beginning to build in the US stock market. Among stocks and sectors showing weakness are transportation stocks, the Nasdaq 100, Google, the US homebuilders, and certain formerly hot “concept” restaurants. Transportation Index – Bulls Still Alive The Dow Jones transportation index is a mixed bag at the present time. The long term chart shows a linear uptrend that deserves respect. The 10 and 40 week moving averages have been breached, although the 40-week moving average is still “in play.” Wednesday’s action looked bad on the surface, but there have been some signs of strength too. The longer term uptrend deserves the benefit of the doubt for now.
The one-year daily chart shows some dubious short term action. I’ve labeled what may be proposed as a head-and-shoulders (HAS) reversal on the right hand side of the chart. As of Wednesday evening, the index is approaching the proposed neck line; yet this HAS is far from perfect.
These “imperfections” are shown in the shorter term daily chart, below. A bearish perspective would argue that the lack of a rally off of the neckline of the right shoulder (so far) could speak to the intensity of the sell off in the transportation index. Yet, a rally from the proposed neckline would better define the HAS reversal pattern but this has yet to occur.
Wednesday’s action left something for the bulls to be optimistic about, though. Below is the daily chart of key transportation index component, Fed Ex (FDX). Fed Ex has traced a similar pattern as the transportation index. Also similar to the index is the lack of a significant right shoulder in the pattern. Wednesday, on bad earnings news, Fed Ex gapped lower by about 4%, but recovered about 1/2 of the initial drop and finished above the proposed neckline by about 1%. This level (~111) requires attention in the next few weeks.
The Point-and-Figure (PAF) chart of the Transportation Index shows that the bulls are “still alive.” Yet one more day of selling would generate a PAF “sell” signal. This “sell” signal would also correspond to the break of the shoulder in the proposed (but imperfect) HAS reversal pattern.
Nasdaq 100 – Looks Tired After leading the US stock market higher through most of the election year-end rally, the Nasdaq 100 now looks tired. While the Dow and S&P 500 averages have made all time and new multi-year highs respectively, the Nasdaq 100 has been locked in a trading range over the last 5 weeks. The lower pane of the weekly chart below shows the performance of the Nasdaq 100 divided by the S&P 500. When the line moves down, the Nasdaq 100 is underperforming the S&P 500 and this is what is happening now. Over the last 3-years, decisive trendline breaks of this chart, as has occurred about 3 weeks ago, have produced reliable sell and buy signals for the Nasdaq 100.
Google – Looks Tired The watched phenomenon, Google, perhaps reflects the tiredness of the Nasdaq 100. While GOOG has advanced to levels where it is sure to be part of the documented history of this bull market, it is important to note that each of its advances have come on diminishing volume. Whereas the previous advance to above 450 has come on weekly volumes of about 50 million shares, the rally to 500 occurred on about one-half of that amount. Is there anyone left to buy Google?
The PAF of GOOG paints an ominous short term picture where a triple bottom breakdown has occurred on Monday of this week. Let’s see how Google reacts to the almost certain wave of Wall Street analyst upgrades.
Homebuilders – The Selling Opportunity of a Lifetime? The Dow Jones Home Construction Index has completed a HAS reversal and met its bearish price objective of about 550. (Almost exactly at the bottom of the red rectangle shown on the chart.) Since that time, beginning in July, the index has produced a sharp rally right up to the neckline, while also breaking above its 10 and 40 week moving averages. Yet the action over the last few weeks has been neutral at best.
In spite of “rock star” (Gates Foundation) publicity of ownership of homebuilder stocks, the index produced a bearish triple bottom breakdown. Although the long term trend (indicated by the blue line) is still up, the shorter term prognosis for the homebuilders is bearish. A rally to 750 would reverse this bearish signal on the PAF.
Formerly Hot Restaurant Stocks Now Look Tired One phenomenon that will be noted when the history of this bull market is written will be that of the loved restaurant stocks, Panera Break (PNRA), P.F. Chang’s China Bistro (PFCB), Red Robin Gourmet Burgers (RRGB), and the Cheesecake Factory (CAKE). Each of these stocks has been bid up to absurd levels considering that there is nothing in their bag of tricks to indicate that they are anything but a restaurant chain. Show some growth, sustainable or not, and today’s Wall Street will see no limits as to how much they can get the public to pay for their shares. The recent underperformance of these formerly loved stocks has occurred in spite of the broader restaurant sector, which has fully participated in the entire stock market rally. 3-year Weekly Chart of the Dow Jones U.S. DJ US Restaurants & Bars Indexsm
While it is still too early to call the completion of the head and shoulders pattern, Panera Bread is forming it now. At the present time, Panera sports a price to earnings ratio of 32, while its price is decisively below the 10 and 40 week moving averages. While the market rallied since the summer, Panera has failed to participate since early October.
There’s similar action in P.F. Chang’s China Bistro, which has a price to earnings ratio of 30.
Although it sports a less expensive valuation, Red Robin Gormet Burgers has something the other’s do not - $105 million in debt. The stock has a propensity for putting out large red candlesticks, and profitable sucker’s rallies. A break below the triangle shown would be bearish.
No company name speaks more clearly about what the US economy has become more than that of the Cheesecake Factory. We don’t have many actual factories in the US anymore, but the amount of “Cheesecake Factories” we have is still growing. While my wife and I have been to all of the other restaurants referenced here and generally enjoyed the experience, I just can’t find the motivation to take my wife to a Cheesecake Factory. As the son of a factory worker, I don’t find the factory motif of the restaurants quaint in any way. Who knows, maybe some day Cheesecake Factories will be converted to actual factories. At that time, will the amount of Cheesecake Factories grow in China and India? The relative strength (compared to the S&P 500) reached new low ground today.
Gold and Gold Stocks There has been nothing in the recent bearish action in the precious metals stocks to change my long term view of gold and gold stocks. The long term chart shows that the $HUI is still in a corrective pattern. Over the last few weeks, it appeared that they may have completed their corrective pattern and started Wave III up.
A closer look at the weekly action shows that the HUI, after whipping above the downtrend (blue) line, now sits right between the convergence of the 10 and 40 week moving averages and just below the trendline.
Is there anything that can be determined from a shorter term view? Since early December, the HUI has been in a downtrend; and the downtrend has yet to be broken as of Wednesday evening. The apparent failure of the HUI to hold the early November high of 341 suggests that the HUI is still in a longer term corrective pattern.
Similarly in the short term, gold has formed a head and shoulders pattern. There’s only one problem. A head and shoulders pattern may be a continuation pattern or a reversal pattern, and one cannot know until the pattern is resolved. The resolution will come with a decisive move below 608, or above 620. If you have to fret about this, your position sizes art too large!
In recent weeks, I pointed to a leading stock Agnico Eagle Mining (AEM), and a lagging stock as potential sector indicators. Here is an updated review. While AEM has retained its sector leadership (see top pane), it has yet to bounce off of support. It sits directly on the support/resistance line.
Sector laggard, Newmont Mining (NEM) seems to have been turned away at resistance – perhaps bearish for the gold stock sector. Newmont now is approaching its 10 week moving average.
A 3-week correction on gold stocks has done nothing to stop the bull run in Royal Gold (RGLD).
Today’s Market There’s no daily market summary today due to holiday schedules. Best wishes to you and your family for a happy and peaceful holiday season. Martin Goldberg
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