Here's the chart showing the relationship between small caps and consumer staples we have been watching for months now. Small caps reflect a go-go bullish market since traders are wiling to take on more risk as the good times flow, and that means investing in small caps. Consumer staples are the other side of the fence, these are the toothpaste, soap and toilet paper stocks, things that human's need daily and that stay steady eddy in good times or bad. Thus, traders run into staples as a place to hide money since staples will hold up better as compared to the broad market during a downturn.
When the chart is moving upwards, that means small caps is preferred over consumer staples, hence, the bulls are running in the broad markets and the booze, and money, is flowing like water. Everyday is a party. When the chart moves down, bad times are coming, economies are swooning, and a black cloud follows you around each day; the future looks gloomy. The 100 week MA serves as a decision making line that helps you gauge if you are at the party or outside in the rain.
From the March 2009 equities bottom, the chart moves up but meets with resistance at the 100 week MA. This means that the enthusiasm towards small caps hits a ceiling and the move up in the broad markets in 2009 is in question. Note how price dances around the 100 week MA and then at Christmas 2009 punches up thru. After another pull back, price punches thru the 100 week MA again, for keeps, and the champagne corks are popping, the bull rally is well underway. Note how price came back down to the 100 MA during the summer 2010 when the broad markets were starting to fall apart. Chairman Bernanke stepped in with QE2 in August 2010, and you can see how the chart above responeded quickly and cranked the music up once again.
The party's over now. The hangover begins. Price came down to bounce off the 100 MA in June, but over the last two weeks it has collapsed thru the 100 week MA. Staples are now preferred to small caps. The traders are selling risky small caps and seeking safer staples moving forward. Note how the green circles show the indicators printing lower lows but price remains elevated. This is bearish moving forward. Projection is sideways to sideways down moving forward, which means ditto for the broad markets. Looking out the window a dark cloud appears above.
For the SML:XLP chart use search box above for keystone speculator.