Tuesday, December 27, 2011

Morning Market -- Is the Market Breaking Out?

Over the last few months, the equity markets have been consolidating.  On Friday, the SPYs broke out:

However, the break-out is very weak -- the candle is small and volume is low.  While the MACD has given a buy signal, the indicator is actually very weak.  And the volume indicators are also weak.  Finally, the EMAs are in a very tight bunch and offer no real help.

The break-out came at the end of the day on a buying surge.  My guess is this is purely technical buying.

However, the IWMs have not broken out.  The average has also printed some very weak candles over the last two sessions.

And the QQQs are still in a very tight range as well.

So -- the only equity index that has broken out is the SPYs.  That is not a bad thing -- after all, one average has to break out before the others.  However, the weakness in the IWMs is troubling; ideally we'd like to see the more speculative indexes move higher first on very strong volume.

In addition, consider where the SPYs are rallying:

Staples, utilities and health care are all responsible for the break-out.  Other, more aggressive areas of the market are still in ranges. 

This is not to say a true break-out is not possible under these circumstances.  For example, consider these charts of various treasury market segments:

 The IEIs have broken their trend line

 The IEFs are just below their trend line, as are

 are the TLTs.

The above charts tell us that money is probably starting to move out of the treasury market.  This is often an event that proceeds a rally as investors look to raise cash to move into equities.

All rallies have some unique characteristics.  However, for me to really agree we're seeing a break-out, I need to see other averages (especially the IWMs) break out on solid volume.   In addition, we need more SPY volume.  We also need to see other, more aggressive sectors rally.To that end, the next moves -- should they occur -- will probably be in the industrials and financials.  Consider these charts:

The XLIs are right at resistance, as are

The XLFs.