The following is a reprint of the market commentary from the March 2014 edition of The Option Advisor, published on Feb. 27. For more information or to subscribe to The Option Advisor, click here.
I've pointed out on many occasions in this space the importance of tracking year-to-date percentage changes for market indices, sectors, and individual stocks, as various levels of round-number gains (or losses) on a year-to-date basis have proven their value time and again as markers for support and resistance.
The first of our two accompanying charts (click to enlarge) compares the year-to-date performance of the Dow Jones Industrial Average (DJIA) with that for the 3 major index ETFs -- the SPDR S&P 500 ETF Trust (SPY), iShares Russell 2000 Index ETF (IWM), and PowerShares QQQ Trust (QQQ).
Note how this cluster of barometers of the health of the U.S. stock market collectively failed to move convincingly into positive territory on a mild market rally in mid-January, which then set the market up for its unpleasant pullback into the end of the month.
But there was greater differentiation as this pullback played out, as only the DJIA fell significantly below the negative 5% mark, while the QQQ held at the negative 4% level. And this disparity has continued to play out on the subsequent rally, with the DJIA still ensconced in negative year-to-date territory, QQQ and IWM now a couple of percentage points to the good, and SPY (representing the largest-cap names) now moving into a positive year-to-date position this week for the first time this year.
I'd suggest you pay particular attention to the year-to-date levels for SPY and the associated S&P 500 Index (SPX) in the days and weeks ahead, because if this week's breakout into positive year-to-date territory is "for real," we could see some significant upside follow-through, with perhaps a quick 10% rally for "openers." But if the move by the S&P into the "green" for 2014 is short-lived and soon rejected, the subsequent pullback could be sharp and scary. (SPY closed 2013 at $184.69; SPX at 1,848.36 -- you can compare their current values to these benchmarks to determine if they are positive or negative for 2014.)
While the year-to-date picture for the U.S. equity market is one of struggle and resistance, our second year-to-date chart (click to enlarge) presents quite the opposite picture for the precious metals ETFs -- the Market Vectors Gold Miners ETF (GDX), SPDR Gold Trust ETF (GLD), and iShares Silver Trust (SLV).
GLD has never been in negative territory on a closing basis in 2014, though it struggled for the past week or so before it took out the +10% level. And note the support at the zero line that emerged for SLV on its late-January pullback, with the subsequent rally then breaking through +10% before weakening. But I find the remarkably strong GDX action (representing the gold mining shares) to be most instructive of all -- first supported at the zero line just after the first of the year, then a struggle at the +10% year-to-date level, and finally a sharp rally that first hurdled a speed bump at +20% and then another at +25% before GDX settled into its current position of bouncing between the +20% and +25% year-to-date levels.
Those who trade these precious metals ETFs should be keeping a close watch on the ongoing battle by GLD and SLV to hurdle the +10% year-to-date line once and for all, as success or failure at +10% could prove a major indicator for whether the remarkable 2014 gains across this sector will undergo a further build, or whether consolidation is in order.
The Case for Big Moves in IWM and QQQ
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