USING PERFORMANCE CHARTS TO SPOT INDUSTRY GROUP LEADERS -- 2009 LEADERS ARE INTERNET, SEMICONDUCTORS, OIL SERVICE, GOLD & SILVER, RETAIL, AND HOUSING -- ROTATION MODEL SHOWS IMPROVEMENT -- DROP IN EURO CAUSES SOME PROFIT-TAKING IN STOCKS AND COMMODITIES

PERFORMANCE CHARTS... One of our readers asked what tools we use to spot sector and industry group leaders. One of the easiest ways is to use the Performance Charts on our main menu. By clicking on that choice, you can chart group performance for U.S. stock indexes, commodity groups, sector SPDRs, and industry group. The last two are the one's I use most often. The most useful time periods are one week, one month, year to date, and one year. [Click F1, F2, F3, and F4 to view them]. Chart 1 is a slightly revised version of the industry group performance bars since the start of the year (F3). I've changed the order of the bars to make them more meaningful, and I'm only showing those groups that have outpeformed the S&P 500 during the first quarter. The top groups are Internet, Semiconductors, Oil Service, Gold & Silver, Retailers, and Housing. Although housing lost ground, it still did better than the S&P 500. You may recall that most of those leaders are the ones that we've been showing most frequently. While chart 1 covers the first quarter, let's zero in on leaders for March.

Chart 1

MARCH INDUSTRY LEADERS... Chart 2 is a slightly revised version of industry group leaders over the last month (F2). All ended in the black and did better than the S&P 500 (which is our cutoff point). The March leaders are Housing (homebuilders), Semiconductors, Retailers, Internet, Gold & Silver, Oil Services, and Banks. We've shown charts of all seven industry groups leaders. The leaders for the last week (F1) are Housing, Banks, Retail, Semis, and Internet. The fact that housing and retailers are among the leaders accounts for recent relative strength in the Consumer Discretionary SPDR (XLY). Internet and Semiconductor leadership accounts for most of the relative strength in the technology sector. That also helps explain why the Nasdaq indexes are the only ones in the black so far this year. The Performance Charts are only a starting point. They tell us where to concentrate our attention. The next step is to look at the individual charts of those leaders. We've been doing a lot of that lately.

Chart 2

LEADER CHARTS ... Although Arthur Hill and I have shown chart of those group leaders, I'm reshowing some of them again. I'm doing so for two reason. One is simply to make the point that at market bottoms, it's usually better to focus on group leaders because they're the ones that are the strongest. A second point is to show that several of the leaders have are nearing tests of their 200-day moving averages. That includes the Internet Index (Chart 3), Semiconductors (Chart 4), and Retailers (Chart 7). And all are nearing overbought levels as measured by the 14-day RSI line (top of charts). What those leaders do at their 200-day lines will help determine if the current rally is just a bear market bounce or something more lasting.

Chart 3

Chart 4

Chart 5

SECTOR ROTATION MODEL... Another reader asked where we are in the Sector Rotation Model. This model is based largely on sector rotation work done by Sam Stovall at Standard & Poor's. The model shows that near the end of an economic downturn money starts to rotate away from defensive groups like consumer staples and utilities and into financials, consumer cyclicals, and technology. Interestingly, those latter groups are the ones that have led the recent market rebound. So the sector model is showing some improvement. The bigger question is whether that improvement is signalling the start of a major bottoming process. It's a little soon to make that call. The good news, however, is that the groups have been showing market leadership during the first quarter are the very ones that should lead at a market bottom. [You'll find a more extensive explanation of the sector rotation process during the business cycle, as well as a longer explanation on how to use Stockchart.com's Performance Charts and Market Carpets in my book "The Second Edition of the Visual Investor"].

Chart 6

DROP IN EURO CAUSES NERVOUS SELLING... More bad economic news from Europe caused the Euro to gap down sharply today (Chart 7). That gave a big boost to the U.S. Dollar which gapped higher (Chart 8). That combination caused some nervous profit-taking in stocks. The boost in the dollar also caused some profit-taking in commodity markets which have been rallying of late along with stocks. Traders apparently figure that it's just a matter of time before the ECB starts to lower European rates more aggressively. The British Pound also fell sharply.

Chart 7

Chart 8

MORE ON FIBONACCI RETRACEMENTS... Someone asked for an update on Fibonacci retracements. Remember first of all that the recent bottom in the S&P 500 began within six points of a 62% retracement of the 1982-2007 uptrend near 660. The weekly bars in Chart 9 show that a 38% retracement of the decline since last May would bring the S&P 500 to its January high. That would still be within the norms of a bear market. The daily bars in Chart 10, however, show that the S&P has retraced 62% of its January/March decline which may explain why it's running into some profit-taking. Some consolidation in this area wouldn't be surprising, although I'd like to see it remain above its 50-day average near 790. If the S&P does enter a downside correction, the next level of support would be its previous week's low at 766 which would also be a 38% retracement of its March advance. The S&P gave back 2% today but in light trading. Apparently, traders took some profits heading into the weekend. No chart damage was done, however, and the March uptrend remains intact.

Chart 9

Chart 10

LUMBER PRICES ARE RISING... One of the most positive signs that the market is improving is buying in homebuilding stocks. Remember that's where the entire problem started a couple of years ago. That's why it was very encouraging to see KB Home jump 7% today on very heavy volume. Chart 11 shows the leading homebuilder having formed a potential "double bottom" between November and March. It's now challenging its December high and its 200-day average. Needless to say, a decisive close over 16 would be good for KBH, the homebuilding group, and the overall market. The homebuilder's relative strength ratio has reached a six-month high. Here's another sign that housing is stabilizing. Chart 12 shows lumber breaking out to a new 2009 high. Nearly half of lumber goes into building homes.

Chart 11

Chart 12