SEMICONDUCTORS STAY STRONG - HEALTHCARE REBOUNDS - BMY AND PFE PACE HEALTHCARE - BIOTECHS SURGE - AMGN AND GILD LEAD BIOTECHS HIGHER - INTERMARKET PICTURE FLIPS IN JUNE - TECHNOLOGY REMAINS A STRONG SECTOR
SEMIS HOLD THE UPTREND... Link for todays video.
The Semiconductors HOLDRS (SMH) remains in an uptrend that has yet to reverse. Chart 1 shows SMH with Andrews Pitchfork (blue lines). The indicators icon is shown at the top of the price chart. After selecting the indicator, users then choose (click) three data points to draw the Pitchfork. These are labeled 1, 2 and 3 on the chart. Andrews Pitchfork shows a price channel that defines the trend, which is currently up for SMH. With the bounce today, SMH successfully tested Pitchfork support to maintain the uptrend. This support level is confirmed by the early June low. A move below the June lows would break Pitchfork support and call for trend reversal.
Chart 1
I am also watching StochRSI for clues on the current uptrend - but not the normal 14-period version. Instead, I am using a 50-day StochRSI with a 5-day SMA to smooth the data. Fifty days covers momentum for 2-3 months. StochRSI is bullish when its 5-day SMA is above .50 and bearish when below .50. Right now StockRSI is bullish and it would take a move below .50 to turn this momentum indicator bearish.
HEALTHCARE STOCKS RECOVER... After getting slammed on Friday, the Healthcare SPDR (XLV) recovered its losses with a bounce over the last two days. Chart 2 shows XLV finding support from broken resistance around 25. This recovery off support certainly looks impressive, but the ETF still remains in a downtrend this month. The pink lines show a small falling channel that looks like a flag. A little follow through is needed to produce a breakout that would fully reverse this decline. The bottom indicator shows the price relative (XLV:$SPX ratio) turning up over the last two days. A break above the May highs would show improving relative strength.
Chart 2
BRISTOL MEYERS SQUIBB AND PFIZER BOUNCE... Within the healthcare sector, Bristol Meyers Squibb (BMY) and Pfizer (PFE) stood out with nice gains and constructive chart patterns. Chart 3 shows BMY with a rather large triangle over the last 2-3 months. The stock found support around 19 twice and surged with good volume today. Follow though with a break above triangle resistance would be bullish. Chart 4 shows PFE with a high volume surge above 15 and a falling flag pullback to around 14. This pullback retraced 50-62% of the prior advance and the stock is firming near its May breakout. Follow though above flag resistance would reverse the four week slide.
Chart 3
Chart 4
BIOTECHS SURGE... Biotech stocks, which are also part of the healthcare sector, showed leadership with some big gains on Wednesday. The Biotech HOLDRs (BBH) surged over 2.5% with a move back above resistance. Chart 5 shows BBH with resistance at 92 extending from November until May. After breaking above this resistance level in early June, the ETF pulled back rather sharply with a falling flag. Todays big gain broke falling flag resistance to reverse the two week slide. The bottom indicator shows the price relative (BBH:$SPX ratio). BBH was showing relative weakness in March-April as the price relative declined. That could be changing as the price relative flatted in May and moved above its May highs with this weeks surge.
Chart 5
Chart 6 shows the Biotech iShares (IBB) with a strong advance on Wednesday. After breaking triangle resistance with a surge above 70, a falling flag formed over the last two weeks. Bullish flags form after an advance and slope down to represent a short corrective period. The subsequent breakout reverses the fall to signal a continuation of the prior advance. IBB is challenging flag resistance with todays surge back above 70. The next resistance zone for IBB is around 74-75 from the Nov-Feb highs.
Chart 6
AMGN AND GILD POWER BIOTECHS... Chart 7 shows Amgen (AMGN) breaking above 52 with its second big move in the last two days. Also notice that the price relative turned up and broke above its May high. Amgen is the biggest component (~36%) in the Biotech HOLDRs. Gilead Sciences (GILD) is the other big component (~31%) in the Biotech HOLDRs. Chart 8 shows GILD breaking above flag resistance with a big move on Wednesday.
Chart 7
Chart 8
THE MAY-JUNE FLIP ... Change is in the air for June. Charts 9 and 10 show intermarket Perfcharts from the last two weeks of May and the first two weeks of June (roughly). Stocks (S&P 500), commodities (CRB Index) and gold were up the last two weeks of May. These gains came at the expense of the Dollar (US Dollar Index) and Bonds (30-year US Treasury), which were down for this same period. The decline in the US Dollar helped commodities and gold, while weakness in bonds probably helped the stock market. After all, the proceeds from the bond decline had to go somewhere. While much of the selling can be attributed to supply coming from government bond issuance, there is also an argument that strength in the stock market foreshadows an economic rebound. This can affect bond prices because the Fed is much more apt to raise interest rates when the economy is strengthening, not weakening. Falling bond prices translate into rising interest rates. It is as if the bond market is doing the Feds work ahead of time.
Chart 9
Chart 10
June has been a different story. Stocks, commodities and gold are down this month, while the US Dollar and bonds are up. We can use some reverse logic for the rational. Obviously, the bounce in the Dollar weighed on commodities and gold. Commodities, in particular oil, were also getting overbought and ripe for a pullback. The greenback was also getting oversold after the March-May plung and ripe for a bounce. Bonds were also quite oversold and ripe for a bounce, which they got over the last five days. In fact, the current five day advance in the 20+ Year Treasury ETF (TLT) is the sharpest since December. The sharp decline in stocks also pushed some money toward the bond market. We should keep an eye on these relationships for clues on future performance. It appears that stocks, commodities and gold are positively correlated to each other, but negatively correlated with the Dollar and bonds. Therefore, further strength in the Dollar and bonds could weigh on stocks, commodities and gold.
SECTOR ROTATION CHANGES IN JUNE... There have also been some changes in sector leadership over the last 4-5 weeks. Chart 11 shows a Perfchart with relative performance for the nine sector SPDRs in the last two weeks of May. Relative performance is found by subtracting the gain/loss in the S&P 500 from the gain/loss in the sector SPDR. For example, if the S&P 500 was up 3% and the Technology SPDR (XLK) was up 5.21%, then relative performance for XLK would be +2.21%. A positive number shows relative strength and a negative number shows relative weakness. In this case, XLK shows relative strength. On the perfchart, we can see that the finance, materials, technology and energy sectors led the market in the last two weeks of May. The consumer staples, healthcare and utilities sectors, which are defensive, lagged the market and showed relative weakness. Also notice that the consumer discretionary and industrials sectors were slightly underperforming the S&P 500.
Chart 11
Chart 12
Chart 12 shows this same PerfChart for the first two weeks of June. The technology sector remains one of the leaders, but the consumer discretionary and the materials sectors have moved into the laggard column. While relative strength in the technology sector is a positive, it is offset by relative weakness in the consumer discretionary sector. The industrials and energy sectors are also weighing down the market. In perhaps the biggest change, the utilities sector has gone from laggard to leader in the last 4-5 weeks. On whole, I view these changes in sector leadership as negative for the overall market. Relative weakness in the most economically sensitive sector, consumer discretionary, is not to be taken lightly. Furthermore, we are also seeing some money rotate into the defensive utilities sector.
