AT&T LEADS STRONG TELECOM GROUP HIGHER -- UPS WEIGHS DOWN TRANSPORTS -- CONSUMER INDEX HITS RECORD HIGH AS INVESTORS CONTINUE TO FAVOR DEFENSIVE STOCKS
AT&T HITS NEW FOUR-YEAR HIGH ... Although the market remains in a short-term rally mode, upside leadership keeps coming from traditionally defensive groups. Today's standout Dow performer was AT&T which surged to the highest level in four years. The daily bars in Chart 1 show that the telecom giant did so on very strong volume. That made Telecom Holders (TTH) one of the day's strongest Exchange Traded Funds. Chart 2 shows TTH also breaking through its spring peak to reach a new multi-year high. Notice that the latest upturn in the relative strength line for the Telecom Holders started in May when the pendulum started swinging toward stocks with defensive characteristics.
Chart 1
Chart 2
A LONG-TERM LOOK AT TELECOM ... The monthly bars in Chart 3 give a longer-term view of the Telecom Holders, and show why the recent upturn is somewhat unusual. The monthly bars show the TTH moving over 30 for the first time in four years. Maybe even more upturn in the recent upturn in its relative strength ratio. The group has badly underperformed the S&P 500 over the last six years as seen by its falling relative strength line. To the bottom right, however, we can see a noticeable upturn in its relative performance. This isn't unlike the same pattern that we saw yesterday in the pharmaceutical group. It seems that investors are starting to favor long-neglected groups that appear to have little downside risk and long-term value. Telecom fits that category.
Chart 3
UPS WEIGHS HEAVILY ON TRANSPORTS ... While telecom stocks were rising, transportation stocks were falling. That was mostly due to the ten percent plunge in UPS which is the world's largest package shipper. Chart 4 shows the stock gapping well below its 200-day moving average to the lowest level in nine months. And it did so on very heavy volume. The market took that as another sign that the global economy might be slowing. The Dow Transports were the day's biggest losers and continue to threaten their 200-day moving average. A late rebound in UPS kept the transportation index on top of its long-term support line. That can be seen in Chart 6 which shows the DJ Transportation iShares (IYT) stabilizing late in the day just above its 200-day line. The ability of the transportation group to stay above that long-term support line is another important test for the overall market.
Chart 4
Chart 5
CONSUMER INDEX BREAKS OUT ... If you're looking for where the real upside action in the market is, Chart 6 should give you a big hint. Its the AMEX Morgan Stanley Consumer Index (CMR). The CMR is designed to measure the performance of consumer-oriented, stable growth industries. The major industries are the beverage, food, drug, tobacco, and personal product sectors. Chart 6 shows it breaking out to a new 2006 high today. Its relative strength line has been rising since late April. Chart 7 puts today's upside breakout in better perspective. It shows the Consumer Index moving above its 2006 peak to achieve a new record high. Notice the relative strength ratio (solid blue line). After rising throughout the 2000-2002 bear market, it fell from late 2002 (when the market bottomed) to the spring of this year. This is the first time in over three years that this defensive group is doing better than the rest of the market (see arrow). There's usually a reason why investors and money managers start to favor those types of defensive stocks. At the very least, it's telling us where investors and money managers are putting their stock market money to work at this point in time. If you're looking to invest (or re-invest) some money in the stock market, I'd suggest following their lead. I'd include telecom on your list as well.
Chart 6
Chart 7
