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Clare White, CMT, On Thursday June 9, 2011, 12:48 pm EDT
Inter-market analysis looks at trends and relative strength for the different asset classes. Some early work written about in the field is from John Murphy in two texts,
Inter-market-Analysis: Trading Strategies for the Global Stock, Bond, Commodity & Currency Markets, andInter-market Analysis: Profiting from Global Market RelationshipsAnother more recently referenced text is Martin Pring’s, “The Investor’s Guide to Active Asset Allocation”, which provides really nice assessments of the major asset class trends associated with different stages of the business cycle.
Incorporating inter-market analysis into a daily analysis is likely too much for the typical trader; however a regular review of charts may help provide insight to changing conditions for markets you trade. If nothing else, it’s a resource to consider when you either feel your usual tools are:
Not providing you with new information orThey suggest the possibility an intermediate term or longer term turning point ahead.In this article, intermediate term is given a 3-6 months timeframe while longer term exceeds 6 months. In addition, the focus for the analysis is SPY, the exchanged traded fund [ETF] asset proxy for the US equities market.
In addition to different asset classes, global equity markets can be incorporated in an assessment of a particular market. A look at the Chinese markets via FXI, a widely followed exchange traded fund that serves as a proxy for the Chinese market, is also provided with the different asset classes.
Chart Specs
Five weekly line charts of ETF asset proxies appear below with commentary following each. In addition to a 20-week and 40-week exponential moving average [EMA], each chart includes the Relative Strength Comparison [RSC] measure which is a smoothed relative ratio. Please note the charts are current as of Friday’s weekly close (6/3/2011).
The chart pairs include the following asset class combinations:
Long term US Treasuries & US Stock MarketUS Stock Market & US DollarUS Dollar & GoldGold & Commodities
Figure 1 Long-Term Treasury ETF (TLT) Weekly Chart with S&P 500 ETF (SPY) RSC
In Aug 2010 TLT has an intermediate term peak that coincided with a peak in the TLT-SPY relationship. A lower high developed in both TLT and the RSC in early Oct 2010 with RSC breaking an intermediate term uptrend immediately afterwards. Since then an intermediate term downtrend in price and the RSC were in place until Feb 2011. The price and RSC action has not been smooth enough to establish an upward trending line for either; however, higher lows and higher highs are n place for both.
Periods of relative strength for TLT versus SPY has generally occurred with bullish behavior in TLT, but also coincides with weakness in SPY. Since Jul 2007, it appears intermediate turns in TLT can lead turns in SPY. This can also develop to longer term trends for both as was the case with the Jul 2007 low for TLT that preceded the eventual Oct 2007 top in SPY, and the Dec 2008 peak in TLT that preceded the Mar 2009 bottom in SPY.
Currently, the intermediate uptrend for TLT is being confirmed by an upward trending 20-week EMA (approximately corresponds to a 100-day EMA or 5-months) and very moderate upward movement in the 40-week EMA (approximately corresponds to a 200-day EMA). It appears a cross of the longer EMA by the shorter one occurs with larger intermediate term moves for SPY or longer term transitions. With this in mind, a cross in the TLT EMAs which could occur this month would suggest there is more upside for TLT and weakness for SPY ahead.
Figure 2 S&P 500 ETF (SPY) Weekly Chart with Dollar Bullish ETF (UUP) RSC
The SPY-UUP relationship has tended to coincide rather than lead since the Oct 2007. In Jan 2010 a short-term break for SPY of its 20-week EMA corresponded with a break in the uptrend of the SPY-UUP RSC line. Although SPY was able to cross back above the 20-week EMA in Feb 2010, the SPY-UUP smoothed ratio was not able to get back up to the upward trending line serving as support since Jul 2009.
Since the Jul 2010 low in SPY, both SPY and the SPY-UUP RSC were trending upward with SPY’s 20-week EMA remaining above the 40-week EMA throughout the period. Most recently, the RSC support line was broken in May while SPY’s break of the 20-week EMA was delayed until June. Both are suggestive of some intermediate term weakness in SPY. This appears to coincide with a sideways trending or short term declines for the RSC line (2007 into 2008 & Apr-Jul 2010). More persistent declines for the RSC appear to be longer term bearish for SPY.
The first sign of a turnaround for SPY (from bearish to bullish) seems to be the development of a higher high and higher low for the RSC. This can occur as SPY moves above and below its EMAs.
Figure 3 Dollar Bullish ETF (UUP) Weekly Chart with Gold ETF (GLD) RSC
The UUP-GLD relationship includes a few different challenges. Since gold is quoted in US dollars, declines in the latter coincide with increases in the former. However, there are periods when both can rise during a “flight to quality” which occurred during different periods in 2010. More persistent weakness in UUP associated with quantitative easing [QE] has been a second challenge in the relationship assessment. Since the second round of QE was announced in Aug 2010, then initiated in Nov 2010, dollar weakness has coincided with persistent gold strength.
The downward trending UUP-GLD RSC line with an initial peak in Jun 2010 has served as both resistance and support for the smoothed ratio for the last year. Currently the RSC line is once again testing this long term trend for support with price action as of Wed 6/8 leading to a rising RSC line. Late into today’s session relative strength in UUP versus should maintain this uptick; however, tomorrow’s movement will be more decisive to close out the week.
Unfortunately UUP has a shorter history than some of the other ETFs displayed. There is only one period of a sustained rising RSC, which occurred as GLD continued to rise longer term. The bulk of the action in SPY was also bullish during that period It appears the secular bull in gold, periods of flight to safety and the fact that gold is denominated in US dollars makes this relationship less informative for the period displayed.
Figure 4 Gold ETF (GLD) Weekly Chart with Commodities ETF (DBC) RSC
A longer term chart is available once again for gold versus commodities as measured by DBC, an actively managed ETF which remains heavily weighted on the energy side. The sustained upward trend mentioned earlier is pretty clear here. The long term trend; however, was interrupted from Mar 2008 through Oct 2008. Downward trending lines have not been displayed on price or the RSC during this period. Instead, a long-term upward trend for the RSC is extended back in time so the resistance it provided on the left-hand portion of the chart is visible.
A tentative support line for GLD for the current rate of ascent has been drawn using the Jul 2010 and Jan 2011 lows and it seems it will be some weeks before the line can be tested and confirmed. A longer term downward trending resistance line has been drawn on the RSC line from Apr 2009 to Mar 2010 and extended to the right. This line was broken in May 2010, but re-established itself in Dec 2010. It recently served as resistance in May 2011. This combined with failure of the RSC to climb back into the longer term uptrend may be suggestive of some weakness ahead for gold.
If you look at any basic trend, momentum or volume indicators for gold, it seems the RSC relationship is the only thing suggesting some potential weakness ahead. With that in mind, confirmation on some of these levels needs to be stressed here even though it applies to all of the RSC relationships. In the event an intermediate term decline develops in GLD, look for a higher high to develop in the RSC line prior to a break of the downward trending resistance line. If both of these developments occur before an intermediate term decline in GLD, monitor movement of the RSC line relative to the long term upward trend line displayed.
2008 marked intermediate to longer term declines in all asset classes, with bonds and gold realizing tops and bottoms more closely together, followed by commodities. The top in UUP led all three, and bottomed shortly after bonds (Jun 2008 versus Jul 2008). The longer term decline in stocks peaked prior to the other four asset classes and bottomed shortly after commodities (feb 2009 versus Mar 2009).
In the current environment it’s unlikely the same rotation will occur and QE2 may have impacted what we might expect to see in the behavior of UUP. Less confidence in the US dollar going forward could make this impact linger. It seems the TLT-SPY and the GLD-DBC relationships are the primary ones that could signal an alert to traders for now.
Figure 5 China Xinhua ETF (FXI) Weekly Chart with S&P 500 ETF (SPY) RSC
The last chart provides a view of the leading nature of FXI to SPY since 2007. FXI is the ETF proxy for the China Xinhua market. Since the Oct 2007in both, FXI has led SPY tops and bottoms by five months. The most recent intermediate top in FXI occurred in Nov 2010, with a possible bottom put in place in both Feb & Mar 2011. If (big if) the current intermediate trend follows those in 2008-2010, the Apr 2011 high will remain an intermediate term peak which could bottom in Jul-Aug 2011.
A recent break of resistance for the FXI-SPY RSC line may is bullish for FXI over the intermediate term, which firms up the prospects of an intermediate term bottom being in place for FXI. Movement of FXI above its intermediate trend line would be another positive development that still needs to be monitored.
Summary for SPY
Overall it seems an intermediate term top is in place for SPY. The most consistent leading market for SPY since 2007 has been FXI and intermediate strength in this ETF favors continued longer term strength for SPY. Traders may want to monitor the Feb & Mar 2011 lows at $41.68 to assess such longer term strength. An intermediate low could be put in place for SPY in the Jul-Aug timeframe, assuming intermediate term strength for FXI and its five month leading behavior holds.
Clare White, CMT
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
Questions for Clare? Please visit the discussion board on the homepage of Optionetics.com.
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