Jobless Claims and China Tensions Send Stocks Lower on the Day

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Key Points

  • Stocks Close in the Red as Jobless Claims Move Higher
  • US / China Tensions Moving to the Front Burner Again
  • Rotation Remains the Theme This Week, Remain Selective
  • Was That a False Breakout in SPY?
  • Futures Point to a Lower Open Today

Key Chart – iShares 20+ Year Treasury Bond ETF (TLT)

The iShares 20+ Year Treasury Bond ETF (TLT) has a Very Bullish Chaikin Power Gauge ETF Rating and continues to be well bid despite extremely low levels of yield on offer. The fund is above the rising long-term trend line while Chaikin Money Flow is strongly bullish.

Stock of the Day – Momenta Pharmaceuticals (MNTA)

Momenta Pharmaceuticals (MNTA) has a Bearish Chaikin Power Gauge Rating and has recently begun to lag the SPY. The OB / OS Indicator is moving lower after failing to reach an oversold position and Chaikin Money Flow has turned bearish. MNTA is below the long-term trend line and triggered a Relative Strength Breakdown Signal today.

The Chaikin Power Gauge Rating for MNTA is Bearish due to very weak earnings performance and poor financial metrics. MNTA’s earnings performance is very weak as a result of poor EPS growth over the past 3-5 years and worse than expected earnings in recent quarters.

Pre-Market Movers

Advancers: SKX (9%), AMD (7%), MPWR (5%), EW (4%), WPX (4%)

Decliners: INTC (13%), MRNA (4%), TSLA (4%), HST (4%), GPS (3%)

Market Commentary/Looking Ahead

US equities closed lower Thursday with S&P 500 breaking a four-day streak of gains. The growth sectors and themes remained under pressure. Staples, Financials and Utilities outperformed. Treasuries were mostly stronger with the back end of the curve leading. The dollar was weaker on the major crosses. Gold finished up 1.3%. WTI Crude settled down 2.0%. Initial claims ticked higher for the first time since April, sparking thoughts that the economic recovery may be losing momentum. At the same time, US / China relations have begun to simmer once again.  

It may have been a false breakout in the SPY. The fund has pulled back after a push through resistance at the $325 mark. We have noted all week that being selective is the best strategy due to the overbought readings from our indicator and that remains the case on the final day of the week.. Our bullish view on the intermediate-term trend remains in place as long as support in the $300 – $310 range holds.

S&P futures are down 0.2% in Friday morning trading after Asian markets were weaker overnight with China down nearly 4%. Japan remained closed for holiday. European markets are under pressure as well. Treasuries are mostly weaker with more curve flattening. The dollar is soft on the yen cross but stronger vs the euro. Gold is little changed. WTI Crude is up 0.8%.

Key Themes and Relationships

High Yield vs. Treasuries

The relationship between high yield bonds (HYG) and intermediate term treasuries (IEF) continues to trade below the 200-day moving average and test the 2016 lows from below. The RSI is in a neutral position after becoming overbought on the rally attempt. This ratio remains in a bearish trend. 

Small Caps Relative to the S&P 500

The iShares Russell 2000 ETF (IWM) remains in a downtrend vs the S&P 500, below the declining 200-day moving average and remains well below broken support. The RSI is moving higher but remains in a bearish regime. We continue to favor large caps over small caps in the current environment and believe that should $300 give way for SPY, IWM is likely to decline more than the overall market.

Consumer Discretionary Relative to Consumer Staples (Equal Weight)

The ratio of consumer discretionary stocks relative to consumer staples stocks continues to trade below the declining 200-day moving average as it tests an important support / resistance zone. The RSI may be in the process of shifting to bullish ranges. Continued improvement here would be a sign that investors are willing to take on more risk, a breakdown sends the opposite message. We use the equal weight ETFs to account for AMZN’s size in the discretionary space.

Semiconductors Relative to the S&P 500

The VanEck Vectors Semiconductor ETF (SMH) remains in an uptrend relative to the S&P 500. The ratio is above the rising 200-day moving average and the RSI is holding bullish ranges despite a rotation out of the growth leaders again this week. Generally, when the semiconductors are leading the market, it is a bullish datapoint for equities. 

High Beta Relative to Low Volatility

The Invesco S&P 500 High Beta ETF (SPHB) relative to the S&P 500 Low Volatility ETF (SPLV) is above the 200-day moving average. The RSI is holding bullish ranges after becoming overbought for the first time in more than two years.

Growth Relative to Value

The iShares Russell 3000 Growth ETF (IUSG) is pulling back relative to the iShares Russell 3000 Value ETF (IUSV). The ratio remains extended above the 200-day moving average. The RSI has left an overbought position and is holding bullish ranges thus far. It has long been our view that in a slow growth economic environment, investors will favor growth stocks and that largely has played out. Recall that we have recently called out the extended nature of this theme. More time may be needed to work off these extended positions but our view is that growth will reassert its leadership role from a trend perspective. 

FAN-MAG Stocks*

The FAN-MAG Index that we have built is also pulling back from an extended position relative to the 200-day moving average. On a relative basis (vs the S&P 500), the group is holding above the breakout level.

*I do not take credit for the name as I heard it while listening to Bloomberg Radio

Copper Relative to Gold

The ratio of Copper to Gold has met resistance at the declining 200-day moving average  The RSI is pulling back from an overbought level and will now attempt to hold bullish ranges. This is a key measure to watch for a read on the growth vs value trade. Further weakness here would signal a likely shift back to the growth leadership which has been in place for more well over a year.       

Take-Away: The key ratios and relationships that we track to gauge the level of risk appetite in the market remain mixed this week. We are closely watching the ratio of copper to gold for a read on the growth / value dynamic in the market. Rotation continues to be the theme this week (recall we called this out as likely in our Market Insights note on July 12th). 

At the same time we continue with a selective approach to bullish ideas as the SPY and IWM are in overbought positions. We will look to become more aggressive as SPY tests the $310 mark which is the top of the support zone that we have been highlighting for the past few weeks. In the interim, risk management is the key strategy. 

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Disclaimer

Disclaimer: Chaikin Analytics LLC is not registered as a securities broker-dealer or advisor either with the U.S. Securities and Exchange Commission or with any state securities regulatory authority. Chaikin Analytics does not recommend the purchase of any stock or advise on the suitability of any trade. The information presented is generic in nature and is not to be construed as an endorsement, recommendation, advice or any offer or solicitation to buy or sell securities of any kind, but solely as information requiring further research as to suitability, accuracy and appropriateness. Users bear sole responsibility for their own stock research and decisions. Read the entire at www.chaikinanalytics.com/disclaimer

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