5 Charts for a Bull-Bear Debate
Let's take a look at some charts you don't see every day. They may tell us something about the underlying strength of this rally in the face of daily Fiscal Cliff drama. Assuming the economy stays on its current '2% growth is good enough' trajectory, stocks look poised to trend higher too.
First up is the S&P 500 Equal Weight index. As the name says, all 500 stocks share the same weighting (about 0.2%), so a behemoth like Apple (AAPL) at roughly 4.5% of the regular index isn't an order of magnitude bigger than the average component.
What's nice to see here is that this index has already recovered its 50-day moving average. It still needs to 'own' it by dipping below and coming back hard above. And for a general indication that the bullish trend is still intact, you need look no further than the rising 100 and 200-day moving averages.
Next up is the Dow Transports, which include stocks like FedEx (FDX) and other trucking/shipping companies, as well as the airlines and rails. Even if you don't follow Dow Theory, you've probably heard that this index has had trouble confirming the rise in the industrial average as 'companies that move stuff' have struggled all year in a choppy sideways grind lower between 4850 and 5250 since the June lows.
Some say this is an out-of-date theory in the age of the semiconductor, but it's still worth looking at in this 3-year weekly chart because if the Trannies can break that downward trend line, it could be confirming lots of broad strength for the indexes and the economy.
Our third chart is a look at the small-caps via the Russell 2000 index. This baby was obviously the leader going down since the September highs, as investors couldn't shed growth-sensitive small caps fast enough going into the election.
What is a little troublesome here is all the gaps on the way up since the November 16 low. The 'RUT' has been following the lead of the S&P and playing catch-up as well. It probably has to digest some of these gains and work off the afterburner fumes. Finding support at its sideways 100 and 200-day moving averages would be constructive.
Number four is a look across the pond. Surprisingly, many European stocks and indexes are looking better than they have in over a year. This surprised me anyway because I expected that we haven't seen the bottom in the European recession and that their stocks would reflect this.
Is this optimism for European stocks all about the ECB getting some degree of QE religion? Not sure, but it doesn't hurt the outlook for global risk appetite, so I'll take it!
Finally, let's look at the Dow. I rarely look at the Dow for any reason because it is an out-dated price-weighted index. I couldn't tell you where it closed on any given day. (I make up for that ignorance by focusing on every twitch in the S&P 500.)
What stands out here is that the Dow has recovered its 200-day very nicely, which happens to be right around the 13,000 round mark. And the 50 and 100-day MAs should be magnets to attract it higher soon, hopefully.
I say 'hopefully' because the 50-day is sloping down fast and the 100-day is flat-lining. Either the mighty Dow can ramp up through them, or it's going to spend Christmas below 13,000.
What Do You See in These Charts?
So that's the view from the charts. I didn't promise you all good news, but the overall picture is pretty healthy. If Washington gets its act together in the next few weeks, we could see an extension of the rally especially as a short squeeze kicks in.
Will we see new highs in 2012? That bet is not looking so promising anymore. I'd settle for a run to S&P 1450 and I think we can buy dips to 1375. A break of 1370 would have me seriously rethinking my bullish thesis.
But every chart can have multiple interpretations, depending on what matters to you most (other indicators perhaps) and what your timeframe is. The ETF swing trader sees dramatically different things than the investor with a 1-year horizon.
Tell me what you see and what you think in the comments section below.
And next week, I'll look at charts for specific sectors to get a gauge on risk appetite in cyclical areas like Technology, Financials, and Industrials. If I'm still bullish in these areas (highly likely), I'll be answering this question...
'Do we you buy IBM (IBM), Goldman Sachs (GS), and Caterpillar (CAT), or just play the sector with an ETF?'
Kevin Cook is a Senior Stock Strategist with Zacks.com
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