ENERGY ETFS BREAK 50-DAY LINES -- MARKET GIVES BACK YESTERDAY'S GAINS -- WHY FALLING COMMODITIES MAY NOT HELP STOCKS
NO FOLLOW-THROUGH FROM YESTERDAY ... When a market records an up day like yesterday -- especially on heavy volume -- it's important to watch for upside follow through. In fact, the market gave back most of yesterday's gains. The only positive factor (and it's a weak one) is that volume was lower today. That puts us back to where we were yesterday morning -- namely, testing critical chart support. Chart 1 shows the Dow Industrials losing more than a hundred points today and sitting right on its 200-day moving average line and its January low. It's testing time again. Another sharp drop in crude oil didn't help. That was offset by weak retail sales, and heavy selling in chip and basic material stocks. The only groups to gain were drug and healthcare which I wrote about earlier today. Dollar strength contributed to selling in commodities. Energy stocks are rolling over.
Chart 1
ENERGY ETFS CLOSE UNDER 50-DAY LINES ... Two of the market's strongest groups over the last year have been basic materials and energy. As commodity prices have started to fall, however, their stocks have come under selling pressure. Earlier today I showed a breakdown in the Materials SPDR (XLB) which was the day's weakest sector. Energy stocks are also feeling the pain of falling crude oil. Charts 2 and 3 show the Energy SPDR (XLE) and the Oil Service Holders (OIH) falling beneath their 50-day averages today. In the case of the XLE, that's the first close beneath the 50-day line since early January. That suggests that profit-taking has finally hit the energy patch. While the long-term trend for energy stocks is still higher, there's plenty of room for a downside correction -- especially considering how far above their 200-day moving average they are. The next paragraph offers one theory as to why the drop in energy and basic materials isn't helping the market.
Chart 2
Chart 3
WEAKNESS IN COMMODITIES ISN'T ALWAYS GOOD ... The three lines shown in Chart 4 compare the three major assets classes -- bonds (green), stocks (purple), and the CRB Index (red) -- since the start of the year. Notice that all three appear to have peaked. It's the order of their peaking that may be important. In intermarket work, the three markets usually peak in a certain order. Bond prices turn down first on the threat of rising inflation; stocks peak second on the threat of rising interest rates; and commodities peak third. In other words, commodities are usually the last group to peak. Historically, that often signals weakness in both bonds and stocks as all three asset classes fall. In that environment, cash is king. That may explain why the recent downturn in commodities -- and their related stocks -- isn't helping the stock market. It may even be hurting it. If the market follows it's normal historical rotation, rate-sensitive stocks (which peak first) are among the first to bottom. With basic materials, gold, and energy stocks coming under selling pressure, the market may react negatively until enough groups turn back up to start the bottoming process. The only winners today were healthcare. Chart 4 may offer one reason why the loss of basic material and energy leadership may not be such a good thing for the market.
Chart 4
