CONSUMER STAPLES PULL MARKET LOWER -- INVESTORS ROTATE INTO THE CHIPS
BEST AND WORST OF THE DAY... Charts 1 and 2 pretty much sum up the major sector movers today. The Consumer Staples Select Sector SPDR tumbled all the way to its August low -- pulled down by the likes of Colgate Palmolive, Procter & Gamble, Alberto Culver and tobacco stocks. This isn't a reversal of an existing trend, but a continuation of one. This group had fallen through most of last week and its relative strength line had been dropping as well. The big loss in this group made the Dow Industrials the biggest percentage loser of the day and was enough to keep it below its 200-day moving average. While most of the market was slipping, the Semiconductor (SOX) Index had a bullish day. Chart 2 shows the AMEX Semiconductor Holders closing above its 50-day moving average on impressive volume. The big green volume bars show that accumulation has been going on in this group for the last week. Given the fact that most market sectors corrected downward today, it's possible that some rotation is going on out of former leaders and into some former laggards like the chips.
Chart 1
Chart 2
BIGGEST STAPLE LOSERS... Colgate Palmolive tumbled to a new 52-week low today on massive volume. But several other stocks in this group suffered a bad combination of falling prices and rising volume. Procter & Gamble broke its 50-day average on rising volume. Alberto Culver broke its 200-day line also on rising volume. The Altria Group also fell on heavy volume. The only possible bright note in today's selling is that the consumer staples group is usually considered to be defensive in nature. I interpreted their relative strength earlier this year as a sign of market weakness. Following that logic, their relative weakness now may actually be a sign of market strength in the sense that investors are selling defensive issues.
Chart 3
Chart 4
Chart 5
CHIP LEADERS ... The next three chip stocks look pretty similar -- and that's part of the message. All of them are safely over their 50-day averages. And all three have been rising on increasing volume. That's a sign of accumulation. I've suggested before that one of the missing ingredients in this market rally has been upside participation (even leadership) by the technology sector and chips in particular. Although today's chip buying may have come at the expense of the rest of the market, it's longer range message may be more positive. In any event, it does suggest that the chips may finally be bottoming. I wrote a piece last week on how to use moving averages for buying and selling purposes. A crossing over the 50-day line is one of my requirements for buying a stock or a group. We've been avoiding chip stocks until now. This week's strong chart action, however, suggests that it's time to start doing a little buying in this group.
Chart 6
Chart 7
Chart 8
MARKET PROBABLY NEEDS A SHORT-TERM PULLBACK ... Over the last week, I've offered a more bullish view of the market between now and yearend. That was based on improving technical indicators, recent sector rotations, traditional fourth quarter strength, and normal post-election buying. I suggested last Wednesday, however, that the market was probably due for a short-term setback. That was based on two factors -- proximity to some overhead resistance and overbought oscillator readings. Chart 9 shows both good and bad news. The good news is that the NYSE Composite Index has broken its March/July down trendline and stands a good chance of continuing higher between now and yearend. The bad news is that it's reached a resistance barrier at its June high just over 6600. On a short-term basis, this is logical chart spot for a pullback to occur. Any time a stock or an index has been rising, and reaches an obvious previous peak like this one, it's normal for some profit-taking to emerge. That's especially true if the market is in a short-term overbought condition -- like this one.
Chart 9
NYSE OSCILLATORS ARE OVERBOUGHT ... This chart is similar to one I showed last Wednesday. In that earlier chart, I showed that the daily stochastic lines were in overbought territory over 80. Problem is that's been the case for the past couple of weeks. Normally, the stochastic lines have to drop back under 80, however, to signal a short-term top. That hasn't happened yet. Another of my favorite tools for pin-pointing short-term tops is the RSI line which is plotted below the chart. The RSI needs to get over 70 to signal an overbought condition. It did that last week, which is its first time over 70 since early June -- just before that last summer slump. Of the two oscillators, the RSI is slower but more reliable. [I've shortened the time span on the RSI from 14 to 9 to make it a little more sensitive and more suitable to current market conditions]. From a charting standpoint, the combination of chart resistance at the June high -- and an overbought RSI line -- makes a short-term pullback likely. To repeat what I said last Wednesday: "A short-term pullback is probably due within the context of an emerging long-term uptrend". If you haven't already done so, please go back and read the last paragraph in that update entitled "Balancing Short and Long-term Views". That should help keep things in their proper perspective. A pullback to one (or both) of the moving average lines wouldn't be surprising and would offer better entry points at lower levels.
Chart 10
