NASDAQ BREAKS SIX-MONTH TRENDLINE -- SARA LEE IS BREAKING OUT -- UTILITIES ARE NEXT AFTER STAPLES -- BOND FUNDS ARE GAINING
SARA LEE REACHES FIVE-YEAR HIGH ... With the market continuing to slide, consumer staples were once again the day's top sector performer. The standout chart belongs to Sara Lee. Its daily chart shows the stock breaking through resistance at 24.50. Its green volume bar shows rising volume on today's upmove. Its relative strength line has also broken out to the upside versus the S&P 500. Its longer term chart looks even better. The monthly bars in Chart 2 show SLE having recently broken through its late 2002 peak at 23.45 to complete a major bottom. Today's close puts the stock above its late 2000 peak as well. That's a five-year high in the face of a falling market. That's good baking. Wrigley also had a strong day on rising volume and is within a point of a new record high.
Chart 1
Chart 2
UTILITIES ARE NEXT ... Back in December, I wrote about how consumer staples were the next in line after energy to take over market leadership in the normal course of events. Since then, staples have been the top performer (with energy in second). If the sector rotations follow their normal historical pattern, utilities are next in line to start showing better relative strength. And, right on cue, utilities now rank third for the new year (+1.6% through Wednesday evening). Chart 3 shows the Utilities Select Sector SPDR (XLU) for the last three months. Although it hasn't moved up much, it's doing much better than the S&P 500. The XLU/SPX ratio line has been moving up since the start of January. That fits into utilities' normal role as a defensive sector. Utilities may also be benefiting from money flows into bond funds, which are closely tied to utilities.
Chart 3
BONDS FUNDS ARE GAINING GROUND ... Many of today's top performing ETFs were bond funds. Two of the strongest are shown below. The 7-10 Year Treasury Bond Fund (IEF) has been trading over its 50-day average all week and is moving up to challenge its October/December resistance line. Its relative strength line (versus the S&P) has also been rising during January. Since bonds are considered an alternative to stocks, they often move in inverse directions. The October peak in the bond prices coincided with a rally in stocks. Now the pendulum is swinging back to bonds. Chart 5 shows a Corporate Bond ETF (LQD) moving up as well. Although I'm not a big fan of bonds on a longer-term basis, there's no denying that they're benefiting from all of the selling in stocks.
Chart 4
Chart 5
NASDAQ 100 BREAKS TRENDLINE SUPPORT... The Nasdaq market took a decided turn for the worse today. Chart 6 shows the Nasdaq 100 Shares (QQQQ) breaking their rising trendline drawn under the August/November lows. That's not good (unless you're short). There's little doubt that the QQQQ is heading to lower levels. It's now a matter of how low. The blue horizontal lines represent percentage retracement levels from the August low to the December high. They help provide downside targets. The QQQQ is nearing a 38% retracement near 37. I doubt if that will hold. The next downside target would be a 50% retracement (see middle line) at 36. That would also be a test of the (red) 200-day moving average. That will be a VERY important test for the Nasdaq and the rest of the market. Volume rose today in the Nasdaq and on the big board as all the major stock indexes lost more ground. The Dow and the S&P 500 indexes are dangerously close to breaking some support levels of their own. They're being hurt by the falling QQQQ/S&P ratio line. That's why Nasdaq underperformance is never good for the market.
Chart 6
