STOCK INDEXES REACH MAJOR RESISTANCE BARRIERS -- SMALL CAPS, FINANCIALS, CHIPS, AND HOMEBUILDERS SHOW RELATIVE WEAKNESS -- LEADERSHIP HAS SWITCHED TO DEFENSIVE CONSUMER STAPLES AND HEALTHCARE
TRENDLINES AND 50% RETRACEMENTS REACHED... The next three charts show the three major U.S. stock indexes having reached formidable overhead resistance barriers. Charts 1 and 2 show the Dow Industrials and the S&P 500 having retraced 50% of their bear market declines. More importantly, both indexes are testing major down trendlines drawn over 2007/2008 peaks. Given the fact that the market has rallied 60% in the last eight months without a meaningful correction, that's some cause for concern. Chart 3 shows a slightly different picture for the Nasdaq market, but the message is essentially the same. The Nasdaq Composite has reached important overhead resistance along its early 2008 trough around 2200. That puts all three stocks up against meaningful resistance barriers. Combined with the fact that numerous short-term divergences are starting to appear among market groups, and the recent rotation toward large-cap stocks in the consumer staple and healthcare categories, it looks like investors are starting to lock in or protect some yearend profits. That could lead to choppier market conditions.
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NEGATIVE DIVERGENCES... Four of the groups shown below have failed to reach their October highs and are trading below their 50-day averages. They include small caps, financials, semiconductors, and homebuilders. All four groups had been market leaders throughout most of the 2009 market rally. Not anymore.
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DEFENSIVE LEADERS ... We've been pointing out for the past few weeks that market leadership has been switching to defensive categories like consumer staples and healthcare. Charts 8 and 9 show the Consumer Staples SPDR (XLP) and the Health Care SPDR (XLV) hitting new recovery highs this week (even as the rest of the market has weakened). Their relative strength lines (below charts) have started to rise for the first time since the market bottomed in March. That's another clue that investors are turning a bit more defensive. Within the healthcare group, pharmaceuticals are doing especially well. In fact, the top group ETF for the week was Pharm Holders (HHH) which are shown in Chart 10. [My November 10 message focused on the recent upturn in healthcare stocks and big pharma in particular]. I wrote last week that new leadership in the Dow Industrials was a defensive maneuver by investors switching to larger and safer stocks. The two top stocks within the Dow this week were Merck and Pfizer both of which hit new 52-week highs.
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CONSUMER STAPLE LEADERS... Several big consumer staple stocks are starting to attract new money as well. Three of this week's top gainers in the group are shown below. They include Campbell Soup, Coca Cola, and Sara Lee. All three are at or very close to 52-week highs. What's especially telling is the recent upturn in their relative strength ratios (solid lines) over the last month or two. It's usually a sign of caution when investors turn to soup, soda, and cake makers. And healthcare.
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