INDUSTRIALS AND CONSUMER DISCRETIONARY SECTORS POWER LATEST LEG - HIGH VOLUME MOVES FOR WHIRLPOOL AND CATERPILLAR - DOW ENTERS POSSIBLE FIFTH WAVE - PUT/CALL RATIO REACHES AN EXTREME

INDUSTRIALS AND CONSUMER DISCRETIONARY SECTORS POWER LATEST LEG ... Link for todays video. Perfchart 1 shows the performance of the nine sector SPDRs since the last upswing began in early February. All nine sectors are up with five up double digits. The S&P 500 is up double digits with a 15.19% gain in 53 trading days, which is less than two calendar months. Even more impressive, the Consumer Discretionary SPDR (XLY) is up 25% and the Industrials SPDR (XLI) is up 23.55%. These are monster gains for less than two months. Such unbridled strength in these two sectors bodes well for the economy. The Fed starts its two day meeting on Tuesday with its policy statement on Wednesday. Strength in the economy may pave the way for a more hawkish Fed.

Chart 1

Throw in the Financials SPDR (XLF) with a 23.12% gain and we have three clear market leaders. The dashed red line marks the performance of the S&P 500. Sectors above the line are outperforming (up more than the S&P 500). Sectors below the line are underperforming (down more than the S&P 500). The Consumer Staples SPDR (XLP), Utilities SPDR (XLU) and Healthcare SPDR (XLV) are the least strong sectors since early February. This makes sense because these three are defensive sectors that outperform when the overall market is weak.

Chart 2

Users can click the S&P 500 tab to change it from white to gray. This sets the S&P 500 has the benchmark and shows relative performance, which is the amount of outperformance or underperformance. Notice that the S&P 500 is now at 0% because its performance equals the performance of the S&P 500, as it should. XLY is up 9.81% more than the S&P 500, hence the outperformance. XLV is up 12.67% less than the S&P 500, hence the underperformance.

WHIRLPOOL AND CATERPILLAR LEAD THEIR SECTORS... Chart 3 shows Whirlpool (WHR) surging over 10% to lead the consumer discretionary sector higher today. Chart 4 shows Caterpillar (CAT) jumping over 4% to lead the industrials sector. Both stocks recorded new 52-week highs on big volume. While big volume normally confirms an advance, exceptionally big volume days can also foreshadow reversals or consolidations. Because both stocks are up sharply today, most analysts would attribute todays volume to buyers. However, dont forget that there is a seller for every buyer. A lot of sellers came out of the woodwork to support todays buying binge. At the very least, a little time is needed to let the dust settle. Notice how Whirlpool surged on big volume in late October and then settled back into a range during November. WHR surged again in early February with big volume and then pulled back sharply the next three days (blue arrows). There were similar instances for CAT.

Chart 3

Chart 4

DOW ENTERS POSSIBLE FIFTH WAVE... There is little doubt that the current trend for stocks is up. Chart 5 shows the Dow up some 70% from its March 2009 low and recently recording a new 52-week high. 14-period RSI moved above 50 at the end of April and has remained above 50 since early July. This momentum oscillator recently moved above 70 for the first time since early May 2007. Overbought? Maybe. Strong? Definitely. One look at the rally reveals a possible five wave advance from March 2009 to the present. John Murphy and I pointed this out a few times already. Frost and Prechter indicate that Fifth Waves are characterized by narrowing breadth and high optimism. I am not sure if we have either right now. For one, breadth appears remains strong as both AD Lines recorded new highs last week. Typically, the AD Line will peak ahead of the market by at least a month. While this could end up a Fifth Wave, chartists need to employ other aspects of technical analysis to identify an actual trend reversal. So far there is no evidence of a downtrend right now. Wave 5 can also be 1.618 of Wave 1 or .618 of Wave 3. These ratios come from Fibonacci and the Golden Mean. This means the minimum Elliott Wave target would be around 11500, or another 2.5% higher.

Chart 5

PUT/CALL RATIO REACHES AN EXTREME... Chart 6 shows a normalized version of the CBOE Total Put/Call Ratio ($CPC). The big window shows the S&P 500, the first indicator window shows the Percentage Price Oscillator (10,200,1) for the CBOE Total Put/Call Ratio and the second indicator window shows the CBOE Total Put/Call Ratio. The Put/Call Ratio moved above 1 when total put volume exceeds total call volume. Notice that this ratio spends most of its time below 1, meaning call volume exceeds put volume. I applied the Percentage Price Oscillator (PPO) to normalize the indicator and make readings more comparable across a time frame. This is simply the percentage difference between the 10-day EMA and the 200-day EMA. The indicator hits extremes when the 10-day EMA moves too far from the 200-day EMA. Typically, an upside extreme occurs above 10 and a downside extreme below -10. Extremely high readings signal relatively heavy put volume and excessive bearishness. Extremely low readings signal relatively heavy call volume and excessive bullishness, which are marked by the red dotted lines. This indicator suggested excessive bullishness in late December, early January, early April and late April. There were some other signals that corresponded with short-term pullbacks in the second half of 2007. With current readings showing a bullish extreme, this could be the excessive optimism of a Fifth Wave.

Chart 6