BUYING INDUSTRIALS AND TRANSPORTS WITH ONE ETF -- GE, TYCO, AND EMR TURN UP -- USE MARKET SUMMARY PAGE TO SPOT INDEX LEADERS -- PLUNGE IN OIL HELPS LAUNCH YEAREND RALLY
BUYING INDUSTRIALS AND TRANSPORTS WITH ONE TRADE... I've been writing a lot lately about the relationship between a strong transportation group and relatively weak industrial group. I wrote yesterday that I believed that the industrials were out of step with the transports (and utilities) and should start rising from here. There's a relatively simple way to buy both groups at the same time and that is by using the AMEX Industrial Select Sector SPDR (XLE). Chart 1 shows the XLI over the last six months. Its ability to continue bouncing off its 200-day average during the spring, August, and October is a sign of strength. The chart also shows the XLI trading over its 50-day average today which can be taken as an intermediate term buy signal. The nice thing about this ETF is that it includes a broad selection of industrial and transportation stocks. It includes some of the big Dow industrials like GE, 3M, United Technologies, Boeing, Caterpillar,Honeywell, and Hewlett Packard. It also includes nine transportation stocks, most of which are concentrated in air freight, rail, and trucking where most of the transport strength has been concentrated. It also includes two airlines -- including Delta which turned up this week.
Chart 1
GE IS BIGGEST HOLDING ... General Electric is the biggest holding (20%) in the Industrial ETF and, therefore, carries a lot of weight. And it's starting to pull its weight. GE is trading back over its 50-day average and appears ready to challenge its autumn high. That will be an important test. The weekly bars in Chart 3 show that GE peaked early in 2004 near 34.50. A close through that chart barrier would put the market bellwether at a new multi-year high. Its relative strength has been rising since the spring as well. I happen to believe that an upside breakout is likely. That would be good for the market, for the Dow Industrials, and very good for the Industrial ETF. The monthly bars in Chart 4 show that a rally to 40 would represent a 50% retracement of GE's 2000-2002 downtrend.
Chart 2
Chart 3
Chart 4
TYCO FORMS DOUBLE BOTTOM NEAR 200-DAY LINE... One of our readers asked me to look for stocks that were forming "double bottoms" near their 200-day average. Here's one in the Industrial ETF. Tyco has bounced twice off support near 29.5 and also its 200-day moving average (see box). It's also breaking through its 50-day moving average.
Chart 5
EMERSON ELECTRIC BREAKS OUT... Here's one of the day's best individual charts in the XLI. Emerson Electric is breaking out to the highest level since the start of the year -- and on rising volume. Its relative strength line is rising impressively as well. That's a bullish combination.
Chart 6
A COUPLE OF TRANSPORTATION LAGGARDS TURN UP ... Most of the air freight, rail, and trucking stocks in the industrial ETF are already trading at 52-week highs. One rail that isn't is Union Pacific. That relative laggard just recently turned up and is trading at the highest level since the spring. Airlines have been the biggest drag in the transportation sector -- until this week. I showed Delta yesterday which has been soaring this week. The other airline in the industrial ETF is Southwest Air. Its daily chart shows LUV breaking through its 200-day average after bouncing off major support at its early 2004 low. Its relative strength line is also starting to rise. It looks like airlines are finally joining the transportation rally. [I mentioned yesterday that this week's upturn in fuel-sensitive airlines might be hinting at a top in oil. Right on cue, oil tumbled $2.70 today]. Which brings us back to the point of this article. Some transportation laggards are just starting to turn up. As are several of the large industrials. You can buy some of the individual stocks -- like the ones shown above. Or you can buy all of them through the Industrials Select Sector SPDR (XLI).
Chart 7
Chart 8
READING THE MARKET SUMMARY PAGE ... If you're not already doing so, I encourage you to keep an eye on the Stockcharts Market Summary page. You can look at it throughout the day to see what's up and what's not. That's where I'm able to tell at a glance what groups or indexes are leading the market higher -- or lower. Today, for example, by simply looking for the biggest green lines, you'll see standout performances by the Nasdaq, Technology, Airlines, Brokers, Internet, and Semiconductors. The red lines show big drops in Oil Services and Energy. Gold stocks also pulled back. If you've been reading my recent articles on sector rotations, you'll know that weakness in oil, combined with strength in technology, is a bullish combination for the market. So is strength in airlines and brokers. Please see my update on that subject published earlier today (October 27, 2004). As I also wrote earlier today, I strongly believe the much-awaited fourth quarter rally is underway. The last two charts show why.
Chart 9
Chart 10
MARKET SOARS WHILE OIL TUMBLES... The last two charts tell the happy tale. Led higher by a strong Nasdaq market, the S&P 500 SPDRs (SPY) jumped over their 200-day average on very impressive volume. (The Nasdaq Composite Index did the same). The major catalyst was a 5% plunge in oil and a sharp drop in oil shares. The final chart shows the Oil Service Holders (OIH) tumbling on massive volume from an apparent "double top" formation. That's the best news of all for a yearend rally.
