HEALTHCARE STOCKS LAG - DEFENSIVE SECTORS SHOW RELATIVE WEAKNESS - DOLLAR STALLS NEAR RESISTANCE - EURO BOUNCES NEAR 62% RETRACEMENT - INTEREST RATES AND THE DOLLAR - GOLD FALLS TO SUPPORT

HEALTHCARE STOCKS LAGGING... Link for todays video. While most of the major indices broke their January high, the Healthcare SPDR (XLV) fell well short of this high and shows relative weakness. Chart 1 shows XLV bouncing with the rest of the market over the last five weeks and hitting resistance around 32, well below the January high. A 62% retracement of the Jan-Feb decline confirms resistance in this area. The advance formed a rising wedge, but XLV has yet to break the wedge trendline or the early March low. A break below these would signal a continuation lower. The indicator window shows the price relative, which compares XLV performance against the S&P 500 via a ratio plot (XLV:$SPX). XLV outperformed from late October until January and then underperformed over the last five weeks.

Chart 1

DEFENSIVE SECTORS SHOW RELATIVE WEAKNESS... Chart 2 shows the S&P Sector Perfchart from February 9th to the present, which encompasses the current five week rally. This Perfchart reflects relative performance, not absolute performance. All sectors are up over the last five weeks, but some are up more than others. Sectors up more than the S&P 500 show positive relative performance, while sectors down more than the S&P 500 show negative relative performance. Unsurprisingly, the defensive sectors are lagging with consumer staples, healthcare and utilities showing negative relative performance. Three of the four offensive sectors are leading (consumer discretionary, industrials and finance). Technology is barely outperforming the S&P 500. This is potentially a concern, but relative strength in the other three offensive sectors bodes well for the market overall. I refer to these four sectors as the offensive sectors because their companies represent growth, discretionary spending, financial stability and the industrial backbone. Their performance is vital to overall market health. Relative weakness in two or more would be negative for the market overall. The defensive sectors are defensive because they represent products and services we need regardless of economic conditions (soap, beer, medicine, beer, electricity, beer, toothpaste and beer). Must be Friday!

Chart 2

DOLLAR INDEX STALLS NEAR RESISTANCE... Chart 3 shows the US Dollar Index ($USD) exceeding 80.5 in early February and stalling the last five weeks. The index is under pressure today with a move down to 80 in early trading. Notice the EOD next to the name in the upper left of the chart. This is an end of day quote and the symbol will be updated after the close. Turning back to the chart, the index is hitting resistance from the June high. A combination of doji and spinning top candlesticks formed over the last five weeks. These show little movement from open to close (Monday open to Friday close). Even though there was some movement during the week with the upper and lower shadows (weekly high-low range), the index finished near its open each of the prior five weeks. There was nothing to show for a weeks worth of trading. True indecision.

Chart 3

Chart 4 shows daily prices with a rising channel or wedge taking shape. The index remains within this channel with support in the 79.5-80 area. A move below this zone would break support and argue for a correction of the December-February advance. For potential downside targets, broken resistance and the 38% retracement converge in the 78.5 area. If the December-February surge signaled the start of a long-term advance, then I would expect corrections to be relatively short (38% versus 62%).

Chart 4

EURO STALLS NEAR 62% RETRACEMENT... We should be watching the Euro for clues on the Dollar because the Euro makes up around 57% of the US Dollar Index and the DB Dollar Bullish ETF. It is by far the single most influential currency. Chart 5 shows the Euro ETF (FXE) stalling near the 62% retracement mark over the last five weeks. This makes sense because the Dollar has been stalling as well. With the Euro firming near a key retracement, we should be on alert for a bounce, even if it is an oversold bounce.

Chart 5

Chart 6 shows daily candlesticks with the Euro ETF moving above its early March high. The Euro is bouncing today on the heels of better-than-expected economic numbers. In particular, Eurostat reported that Eurozone industrial production rose 1.7%, which was the biggest advance since the series began in 1990. This news boosted the Euro because it signals strength in the economy. The European Central Bank is more apt to raise interest rates when the economy is expanding, not contracting. While the Euro is long overdue for a bounce, it may run into resistance sooner rather than later. The December trendline is already coming into play and RSI moved into the 50-60 zone. Notice how this zone acted as resistance in mid January. A break above 138 would open the door to the next resistance zone around 141-142.

Chart 6

INTEREST RATES AND THE DOLLAR... There are many influences on currency cross rates. In particular interest rate differentials play an important part. For instance, the US 10-Year Treasury Note yields around 3.73% and the German Bund yields 3.19%. Investors get more return from Dollar denominated Treasuries than Euro denominated Bunds. Chart 7 shows the 10-Year Treasury Yield ($TNX) breaking resistance in December and holding this breakout in February-March. The indicator window shows the 10-Year Treasury Yield with the US Dollar Index. Both bottomed in December. Short-term rates also appear to influence the Dollar. Chart 8 shows the 3-month T-Bill Rate ($IRX) also bottoming in December and shooting higher the last two months.

Chart 7

Chart 8

GOLD DECLINES INTO SUPPORT ZONE... After breaking wedge resistance, chart 9 shows the Gold ETF (GLD) getting cold feet with a decline back into the prior resistance zone, which now becomes support. The yellow support zone stems from the early February high, the wedge breakout and the late February low (blue arrows). This is an important test for gold. Failure to hold this support zone would negate the wedge breakout. The indicator window shows GLD and the DB Dollar Bullish ETF (UUP). GLD bottomed in early February and has been zigzagging higher the last five weeks. UUP, on the other hand, has traded flat the last five weeks. Gold benefitted when the Dollar stalled for five weeks. Prior to this period, notice that GLD declined as the UUP advanced from early December to early February. Gold is still cuing off the Dollar and we should continue to watch the greenback for clues. An upside breakout in the Euro and downside break in the Dollar would be bullish for bullion. Opposite breaks would be bearish for bullion.

Chart 9

Chart 10