DEFENSIVE LEADERS ARE KROGER, AMGEN, AND EXELON -- SECTOR ROTATION MODEL FAVORS STAPLES, HEALTHCARE, AND UTILITIES -- WITH MATERIALS PEAKING, ENERGY STOCKS MAY BE VULNERABLE -- WEAK ECONOMIC NEWS IS CONFIRMING WHAT THE MARKET TOLD US SIX MONTHS AGO
DEFENSIVE STOCK LEADERS ... Arthur Hill pointed out again yesterday that defensive groups like consumer staples, healthchare, and utilities have been attracting new money over the past month. By using our Sector Market Carpet, I've isolated a leading stock in each of those three groups. They should offer some protection in a bear market. Kroger is one of the top performers in the consumer staples group. Chart 1 shows the defensive stock rallying on strong volume and challenging its October high. Its relative strength line has already hit a new high. The monthly bars in Chart 2 also paint a bullish picture. They show Kroger in a steady uptrend and nearing a test of its 2007/1999 highs. Its monthly relative strength line (below the chart) has reached a seven-year high.
Chart 1
Chart 2
AMGEN CLEARS 200-DAY LINE... Amgen has become a healthcare leader. The daily bars in Chart 3 show the stock breaking through its 200-day average (red line) for the first time in more than a year (on rising volume). Its relative strength line has turned up as well. The monthly bars in Chart 4 show the healthcare stock bouncing off chart support formed at the start of 2003. Its monthly relative strength is bouncing for the first time in two years. That makes Amgen a relative bargain.
Chart 3
Chart 4
EXELON HITS NEW RECORD ... Exelon is a leader in the utility group. The daily bars in Chart 5 show the stock nearing a new record after recently exceeding its January high. The stock has bounced off its 50-day average twice in the last two months. Its relative strength line is at a new high as well. One of the basic principles of sector rotation is to find groups that are showing relative strength. The second step is to find stock leaders in those groups. The three stocks shown herein qualify on both counts.
Chart 5
SECTOR ROTATION MODEL ... One of our readers asked where we are in the Sector Rotation Model. That model shows the normal sector rotation that takes place at various stages in the business cycle. The chart shows that basic materials and energy are market leaders at a market peak. As the economy starts to slow, money starts to rotate out of those two inflation-sensitive groups. Basic materials peak first and energy last. This week's downturn in basic material stocks suggests that the topping process is moving even further along. Energy may be the next to roll over. As the economy slows, money flows into consumer staples, healthcare services, and utilities. That's where we appear to be right now. One way we can tell that a bottom is near is when money starts to flow into financial and consumer discretionary stocks. So far, there's no sign of that happening. That leaves us in the midst of a bear market with money flowing toward staples, healthcare, and utilities.
Chart 6
STOCKS LEAD THE ECONOMY ... Everytime I show the Sector Rotation Model in Chart 6, I feel the need to point out that the stock market (red line) peaks well before the economy (green line). Although most of us are aware that the stock market is a leading indicator of the economy, that point keeps getting lost on Wall Street and the media. Ever since the market peaked last fall, the media has presented a parade of economists arguing that the economy was still on sound footing. I remember seeing a headline"fear versus fundamentals" back in January (that was repeated again this week on CNBC). The implication being that the market was falling on "fear" instead of "fundamentals". With the stock market having had one of the worst first halfs in decades, we're now starting to get confirmation that the economy is in bad shape. It's a little late for that to do anybody any good. That's why we study the market and pretty much ignore the media, economists, and Wall Street suits.
