MORE ON SECTOR ROTATIONS -- COMMODITY-RELATED STOCKS ARE SLIPPING -- AIRLINES ARE LEADING MARKET BOUNCE -- DOW AND S&P ARE DUE FOR OVERSOLD BOUNCE
BASIC MATERIALS AND ENERGY ARE SLIPPPING... Basic materials and energy were among yesterday's weakest groups. The Materials Sector SPDR (XLB) and the Oil Service Holders (OIH) both closed beneath their 50-day moving averages. The month of March has also seen some slippage in their relative strength lines. While that doesn't change their long-term trend (which is still up), it does suggest some sector rotation out of commodity-related stocks over the short run. The question is what does that mean for the market as a whole. And what sectors might benefit the most from a pullback from energy shares in particular. Let's start with the market.
Chart 1
Chart 2
DOW AND S&P ARE OVERSOLD AND NEAR SUPPORT... Yesterday's selling pushed the Dow and the S&P 500 closer to chart support at their late-January lows and may have set the stage for a short-term rebound. Charts 3 and 4 are similar. First of all, the daily oscillators on both charts show the market indexes to be in short-term oversold conditions. The RSI line is bouncing from oversold territory under 30, while the stochastic lines are in oversold territory under 20 and may be turning higher. Yesterday's intra-day low brought the Dow to within 28 points of its January low. The Dow may also get some support from its 200-day average. Yesterday's 1163 low in the S&P 500 duplicated its late-January low. In other words, both indexes have reached a crucial testing point. Although I believe that those lows will eventually be broken, I think the market will attempt a rebound first. Both indexes could retrace a third to a half of their March declines which would put them near their 50-day averages.
Chart 3
Chart 4
WATCHING THE AIRLINES ... I've written several times over the last few months that energy leadership is normally a bad thing for the market. And it has been. Basic material stocks have also done well on the back of rising commodity prices. If commodity related stocks are entering a downside correction, the question is where should some new buying come from. One answer is transportation -- and airlines in particular. At least that's where rallies are supposed to start. Chart 5 plots the AMEX Airline Index (XAL) for the last year. The XAL/S&P ratio along the bottom of the chart shows that airlines have been poor relative performers. Airline stocks are rising sharply today, however,and are leading the market higher. Their relative strength line may be turning up as well from an area of chart support long the October low. That's partially due to falling energy prices. Airlines are the most energy sensitive market group. [Rails, truckers, and ocean freight have become less energy sensitive because of their ability to pass their fuel costs along to their customers. And because they've actually benefited from the movement of commodities and oil.]
Chart 5
Chart 6
AIRLINES ARE FUEL-SENSITIVE... Chart 6 overlays the Airline Index (daily bars) and the Oil Service Index (solid black line) since last August. An inverse relationship is clearly seen. The surge in oil stocks last August pushed airlines lower. A lower oil market during the fourth quarter fueled a strong airline rally. The upturn in oil in January coincided with a big airline slide. With oil (and oil stocks) on the defensive, airline stocks are the day's strongest group. Historically, rising fuel prices have hurt the market -- and airlines in particular. The fact that airlines are taking off today suggests that energy is starting to soften. That should help fuel a market bounce as well. With the market averages testing support levels, a bounce would come at a good time.
