Although I am not going to cover the larger indexes here because they are covered very well in the Market Wrap and the Futures wrap and will be concentrating on the smaller sub indexes like the $BKX, $SOX and the $TRAN I would like to make a comment about the general health of the market.
The lack of movement in the major indexes may be frustrating some investors but the last few months' of sideways movement has made many stocks attractive because earnings have been increasing. The price-to- earnings ratio of the Standard & Poor's 500 index has fallen to its lowest valuation in the past 25 years. If the stock prices stay the same, while earnings increase the P/E ratio drops. The lower the ratio, the better its value. The average P/E ratio of the S&P dating back to 1950 is 17.8 with the peak at 35.1 in July 1999. Currently, it is about 16, based on next year's projected earnings.
First of let's look at the banking index $BKX, a capitalization- weighted index composed of 24 geographically diverse stocks representing national money center banks and leading regional institutions.
Looking at the monthly chart, the all time high was made in March 31st of 2004 when it reached a high of 103.
Monthly Chart of BKX
Daily Chart of BKX
The index is currently at 99 and within striking range of making another all time high. It is making higher highs and higher lows with a MACD that supports the trend for it is making higher highs and lows also. This is a healthy looking chart.
But what about interest rates? Won't higher rates put a dampening on this index? Yes and no. Bank profit margins improve when rates are higher - the higher interest rates allow for a wider spread between the rates at which banks charge and the rates at which they must borrow themselves. Plus, the Fed has basically explained how the rate hikes are going to be laid out so, their plan of action is largely built into stock prices already.
On the other hand there is the Semiconductor Index $SOX. Its all time high was 1362 made back in March of 2000. Remember back then?
Monthly Chart of $SOX
Daily Chart of $SOX
The $SOX made a daily high of 398, which is higher than the last swing high made August 23rd at 394 making a higher high. This index has also built a positive MACD divergence. So life is coming back into this index but it needs a lot of oxygen to get back to respectable levels. And even if it does continue its upward move, it has to contend with the red down trendline at approximately 457. A lot of work needs to be done here but the work has started. This chart is not bullish yet but is starting to grow some horns.
The Airline index ($XAL) is composed of ALK, NWAS, AMR, XJT, CAL, JBLU, LUV, AAI, SKYW and DAL, and is designed to measure the performance of highly capitalized companies in the airline industry. Needless to say the XAL has been struggling lately and the latest casualty is the announcement today that US AIRWAYS Group Inc (UAIR) is seeking bankruptcy protection for the second time in 25 months. This came 3 years and 1 day after the September 11th terrorist attacks, one of the largest crisis's in US airline history.
Monthly Chart of XAL
Daily Chart of XAL
The $XAL chart looks pretty terrible but the news out of UAIR did not put a dampening on the small recovery we have witnessed since August 10th. If XAL can get back through the last swing high at 50 it may have a chance, of course there is the down trendline it will have to contend with at approximately 53 before we can say this index has changed course. With the price of oil still above $40/bbl the upside in this index will be pretty muted.
The Dow Jones Transport Index is made up of 20 stocks; ALEX, AMR, BNI, CHRW, CNF, CAL, CSX, DAL, EXPD, FDX, GMT, JBHT, NSC, NWAC, R, LUV, UNP, UPS, USFC and YELL.
Monthly Chart of TRAN
Although the $TRAN is not challenging its all time high of 3797 set back in May 1999 it is one of the more bullish indexes. On the monthly chart it made a double bottom in September 2001 and March 2003. A print above the March 2002 swing high confirmed the bullish formation.
Daily Chart of TRAN
The daily chart shows a series of higher highs and higher lows, which is the definition of an uptrend but unfortunately they are not been supported by the MACD like in the banking index. This is not serious but would give more credence to the bullish scenario.
One of the key basic Dow Theories is that the Dow Transportation Average leads the Dow Industrial Average. So seeing the Dow Jones Transportation Average acting this strong helps to build a bullish scenario for the stock market in general. But beware the Dow Theory is a longer-term pattern that you should be watched for several months.
All in all the indexes are either bullish or in the beginning stages of becoming bullish. I don't think the market can sustain an upward movement with the SOX getting on board and what I am seeing in this index leads me to believe we have more upside in our future.