BANKS LEAD MARKET HIGHER - REIT ETF BREAKS 50-DAY - PUBLIC STORAGE AND DUKE REALTY BREAK MARCH HIGHS - LEADING AND LAGGING SECTORS - BULLISH PERCENT INDEX LEADERS - DIA CHALLENGES BROKEN SUPPORT

FINANCIALS LEAD THE CHARGE... Stocks opened strong this morning with financials leading the way higher. Chart 1 shows 60-minute bars for the Financials SPDR (XLF) over the last 6-7 weeks. Notice that XLF surged above 9.5 in mid March and then consolidated for around three weeks. As the red arrows show, the ETF hit resistance at least three times around 9.5. A higher low formed with the late March dip and the pattern over the last few weeks looks like an ascending triangle, which is a bullish continuation pattern. With a gap and big move early Thursday, XLF broke triangle resistance to signal a continuation higher. John Murphy pointed out an inverse head-and-shoulders pattern on Tuesday. XLF also broke neckline resistance this morning. A strong security should hold its gap and breakout. A move below this week's low would negate today's breakout. Chart 2 shows the Regional Bank HOLDRS (RKH) with an ascending triangle breakout as well.

Chart 1

Chart 2

REITS PLAY CATCH UP... REITs are part of the financial sector, but the group has been lagging both the Financials SPDR and the broader market. This may be changing as the REIT iShares (IYR) broke consolidation resistance over the last few days. Chart 3 shows IYR surging above its March highs with a big move last week. The ETF fell back Monday-Tuesday, but regained its footing over the last two days. IYR is back above its 50-day and starting to show signs of life. Chart 4 shows Duke Realty (DRE) with a breakout last week and a move above the 50-day. Chart 5 shows Public Storage (PSA) with characteristics similar to the REIT iShares.

Chart 3

Chart 4

Chart 5

LEADING AND LAGGING SECTORS ... The S&P 500 can be divided into nine sectors, which are conveniently represented by the nine sector SPDRs. John Murphy showed the sector rotation model on 27 March and noted that the right sectors were showing leadership. To build on this concept, I am showing the sector SPDR Perfcharts. PerfChart 6 shows the percentage change since March 9th, which was when the big rally kicked off. The blue dotted line marks the percentage gain in the S&P 500, which acts as the benchmark. The Financials SPDR is far and away the top performer. Other leaders include the Consumer Discretionary SPDR, Industrials SPDR, Technology SPDR (XLK) and Materials SPDR (XLB). With lots of retail stocks, the consumer discretionary sector is the most economically sensitive. This sector often shows weakness ahead of an economic recession and strength ahead of an economic expansion.

Chart 6

PerfChart 7 shows the nine sectors relative to the S&P 500. For this example, I clicked on the S&P 500 tab to make it the base index. Sectors in positive territory are up more than the S&P 500 and outperforming. Sectors in negative territory are up less than the S&P 500 and underperforming. This version makes it easy to distinguish between the leaders and the laggards. The Energy SPDR (XLE), Consumer Staples SPDR (XLP), Healthcare SPDR (XLV) and Utilities SPDR (XLU) are the clear laggards. All four are up less than the S&P 500 since 9 March. Moreover, these sectors are traditionally defensive. They hold up better in a bear market, but lag during a broad market advance.

Chart 7

BULLISH PERCENT LEADERS... Analyzing the Bullish Percent Index (BPI) is another means to distinguish between the leaders and the laggards. Bullish Percent Indices are available every day in the market summary. The BPI is calculated by dividing the number of stocks trading with PnF buy signals by the total number of stocks in the sector. This makes it a breadth indicator that can be compared across the sectors. A simple ranking shows that the financial, consumer discretionary and info tech sectors have the highest scores for the Bullish Percent Index (BPI). These sectors are the current leaders.

Chart 8

WATCH OUT FOR OVERBOUGHT BPI... Even though the consumer discretionary is one of the leaders, its Bullish Percent Index is nearing overbought levels. Chart 9 shows the Consumer Discretionary SPDR (XLY) with the Bullish Percent Index for the consumer discretionary sector ($BPDISC). The red dotted lines show when the BPI moved above 63. In five of six cases, XLY peaked within a few weeks of BPI surpassing 63. The exception was the final bull market rally from October 2006 to February 2007. A bearish divergence formed with the February 2007 peak. Also notice that a big bullish divergence formed ahead of the March low.

Chart 9

MATCHING SECTORS AND BPI... The table below shows symbol pairings for the sector SPDR and its equivalent Bullish Percent Index (BPI). The telecom sector does not have an equivalent SPDR.

• XLB and $BPMATE
• XLP and $BPSTAP
• XLE and $BPENER
• XLF and $BPFINA
• XLV and $BPHEAL
• XLK and $BPINFO
• XLI and $BPINDY
• XLB and $BPMATE
• XLU and $BPUTIL

DIA CHALLENGES BROKEN SUPPORT... Chart 11 shows weekly candlesticks for the Dow Industrials ETF (DIA) over the last 18 months. DIA broke support around 80 in February and declined to a new low in March. With a big surge the last 4-5 weeks, DIA returned to broken support for its first big test. This is a basic tenet of technical analysis: broken support turns into resistance. The ETF stalled this week to confirm this resistance area. The surge to broken support was incredibly strong (+23% in four weeks). This created overbought conditions that may require a corrective period. Once this corrective period ends, we could see a move towards the next resistance area around 90. The December highs and falling 40-week moving average mark resistance here.

Chart 10