MARKET MAY BE TURNING A BIT DEFENSIVE AS GOLD AND OIL BOUNCE -- HEALTHCARE AND UTILITIES ARE SHOWING NEW STRENGTH -- A POINT & FIGURE LOOK AT THE VIX
BOUNCE IN ENERGY SECTOR ... With the Nasdaq starting to slip a bit, and the Dow struggling with psychologicl resistance around 12,000 (in a generally overbought market), one of our readers if there were any new signs that the market was turning a bit defensive. Actually there are, but they're somewhat tentative at this point. One of the reasons may be the bounce in energy shares (which hint at higher energy prices). Energy stocks are today's strongest market sector. Chart 1 shows the Energy SPDR (XLE) having bounced off its summer lows and trying to clear its moving average lines. The XLE/S&P relative strength line is bouncing for the first time since August. Today's OPEC announcement formalizing a cut in output may also be worrying stock traders a bit. Precious metals (and their stocks) are continuing to rally as well.
Chart 1
PRECIOUS METALS CONTINUE BOUNCE OFF SUMMER LOWS ... Precious metals (and their related stocks) continue to rebound off their summer lows. Charts 2 and 3 show the Gold & Silver (XAU) Index and the Gold Trust Shares (GLD) doing just that. Chart 4 shows the Silver iShares (SLV) exceeding their late September peak to lead the group higher. Part of the new buying in precious metals is coming from a weaker dollar and stronger foreign currencies. Chart 5 shows the Euro bouncing off chart support along summer lows and its 200-day moving average. Euro strength usually translates into gold buying. A large part of the new optimism in the stock market has been predicated on falling commodities and lower inflation expectations. Any decent bounce in an oversold commodity sector may be enough to stall the advance in an overbought stock market.
Chart 2
Chart 3
Chart 4
Chart 5
UTILITIES HIT NEW HIGHS... Another hint of investors shifting a little more to defense is seen in the Dow Utilities which are now trading at a new record high. This defensive group has lagged behind the Industrials since August when the current market rally began. The relative strength line for the utilities (solid line) is starting to rise for the first time in two months. Another defensive group that's had a strong week is healthcare.
Chart 6
HEALTHCHARE SECTOR HAS STRONG WEEK ... Chart 7 shows the Health Care SPDR (XLV) hitting a new record high. What I find more interesting is this week's upmove in its relative strength line (solid line). It's been falling since early September as the market surged. The RS line turned up this week which I interpret as another sign that investors are starting to lean back to some defensive groups. Yesterday I showed the strong chart action in the pharmaceutical group which is giving a big boost to the XLV. Biotechs are also providing support for the first time in awhile. Chart 8 shows the Biotechnology Index turning up during October along with its relative strength line.
Chart 7
Chart 8
A POINT & FIGURE CHART OF THE VIX ... My explanation about the CBOE Volatility (VIX) on Tuesday created some confusion for some readers. A low VIX reading is usually associated with an over-extended stock market. In order to signal a possible downside correction in stocks, however, the VIX has to start rising. That hasn't happened yet. Chart 9 is a point & figure version of the VIX. The x columns represents rising prices, while the o colums show declining prices. Although the VIX has reached a potential support zone near its spring low, it's still in a downtrend. In order to signal a trend reversal to the upside, the first thing it needs to do is exceed the top of the last x column. In other words, the VIX would have to rise to 13.50 to give a short-term buy signal for the VIX and a short-term sell signal for the market. As long as the VIX stays low, the market can keep rallying.
Chart 9
