SOME CONSUMER STAPLE AND ENERGY LEADERS -- HOW TO BENEFIT FROM FALLING DOLLAR -- FINANCIALS TEST LONG-TERM SUPPORT -- P&F TRENDS ARE STILL DOWN
CONSUMER STAPLES DOING RELATIVELY WELL... Last Friday I wrote about new signs of relative strength in the consumer staples sector. When I refer to relative strength, I mean how a group is doing relative to the S&P 500. That doesn't necessarily mean that a group is rising. In this case, it means that the group is falling less than the S&P. Which brings us to a discussion of absolute versus relative strength. Chart 1 shows the Consumer Staples Sector SPDR (XLP) trading below its 50-day moving average. That means that its short-term trend has turned down. The solid line below the chart is a relative strength ratio of the XLP divided by the SPX. Notice that the line has risen since mid-February. That simply means that consumer staples have done better than the S&P 500. However, the group as a whole is still losing money. One way to get around that problem is to look for individual consumer staple stocks that are also showing absolute gains. Last week I showed Coors (TAP), Hershey (HSY), and Kellogg (K) in chart uptrends. HSY and K rose again this week, while HSY pulled back. This week I have three more staple leaders.
Chart 1
KROGER REACHES FIVE-YEAR HIGH ... Kroger, the large grocery chain, was the week's leader in consumer staples. The monthly bars in Chart 2 show KR trading at the highest level since 2001. The stock is about to challenge that resistance barrier near 27.50. Upside volume has been supportive. The stock's relative strength ratio (below chart) started to bounce in the middle of 2005 when the stock broke a six-year down trendline. The RS line is now rising. That makes for absolute and relative strength.
Chart 2
WALGREEN AND WRIGLEY HAVE STRONG WEEK... The weekly bars in the next two consumer staple leaders have three things in common. And all of them are positive. The weekly price bars closed over moving average lines, volume rose, as did their relative strength lines. That's an impressive show of absolute and relative strength in a falling market.
Chart 3
Chart 4
A COUPLE OF ENERGY LEADERS ... Energy stocks as a group lost a small amount of ground this week, but held up much better than the rest of the market. Two energy leaders that gained ground are shown below. National Oilwell Varco is the more impressive of the two. The weekly bars in Chart 5 show the stock rising to a new 52-week high, and nearing a test of its all-time high at 77.60. Its relative strength ratio (below the chart) has broken a yearlong down trendline. Smith International in Chart 6 is also showing better relative strength. That energy leader is moving up to test its old highs around 45.
Chart 5
Chart 6
FALLING DOLLAR FUND IS RISING ... I like to point out some potentially profitable investments that many of you may not be aware of outside of the bond and stock markets. This one has to do with U.S. Dollar. Chart 7 shows that the U.S. Dollar Index has been weakening since late January. [The USD measures the dollar against six foreign currencies]. Although most of my recent attention has been on the rising yen, the Euro has been rising against the dollar as well. In today's trading, the U.S. Dollar has fallen sharply against all major foreign currencies. Chart 7 shows the USD falling to the lowest level of the year in today's trading. [The reasons for the dollar drop may have to do with subprime mortgage problems and fears of a slowing U.S. economy]. There's a way to profit from that dollar drop. Chart 8 shows the ProFund Falling US Dollar Fund (FDPIX). That mutual fund rises when the U.S. Dollar Index falls. As you can see, it's moving higher as the U.S. Dollar is moving lower. There's always something moving up somewhere. Our job is to find it.
Chart 7
Chart 8
FINANCIALS HOLD THE KEY TO THE MARKET ... It's no secret that one of the main problems pulling the market down over the last month has been the fallout from subprime mortages. It's also no surprise to read that financial stocks (mainly banks and brokers) have been the weakest part of the market over the last couple of weeks. That's a concern because financial stocks are historically viewed as market leaders. They had been leading the market higher over the last two years. Not anymore. The line on top of Chart 9 is a ratio of the Financials Select SPDR (XLF) divided by the S&P 500. That ratio peaked in October of last year, and failed to confirm this year's move to new high ground (red arrow). Even worse, the ratio has fallen to the lowest level since last May. The group itself is now in the process of testing some long-term support lines. One is the 200-day moving average. That support line line hasn't been decisively broken for eighteen months (red circles). Chart 10 shows the XLF also testing a four-year uptrend line (drawn on a log scale). Chart 10 holds some other warnings. One is the unusually heavy downside volume over the last month. Another is the fact that the 14-month RSI is turning down from major overbought territory over 70 (down arrow). The financial sector is undergoing a major test of its long-term uptrend. That's a big test for the rest of the market as well.
Chart 9
Chart 10
SHORT-TERM TREND IS STILL DOWN ... One of our readers asked if the Dow and other major stock indexes were on point & figure sell signals. The answer is yes. Chart 11 shows the Dow Industrials giving a p&f sell signal at 12500 in late February (the first sell signal in seven months). The Dow now has to close at 12350 or higher (above the last x column) to repair some of the technical damage. The rising blue line is Chart 11 represents a potential support line (and coincides with the Dow's 200-day moving average). Chart 12 shows the Nasdaq Composite still on a sell signal from 2440 in late February. The Nasdaq needs to close at 2410 or higher to improve its short-term trend. Its blue support line (drawn at a 45 degree angle) has been broken.
Chart 11
Chart 12
