DIVIDEND ISHARES OFFER DEFENSIVE PROTECTION -- DVY LEADERS INCLUDE ENTERGY, CENTURYLINK, MCDONALDS, KIMBERLY CLARK, AND CLOROX -- GOLD LEADERS ARE ELDORADO AND IAMGOLD
SELECT DIVIDEND ISHARES SHOW RELATIVE STRENGTH... My last message suggested that dividend paying stocks (especially telecom and utilities) offered defensive protection in a slowing economy with falling interest rates. The DJ Select Dividend Index Fund (DVY) offers a simple way to take advantage of that dividend benefit. Chart 1 shows the DVY holding above its 50- and 200-day moving averages after recently exeeding its June high. The rising relative strength line (below chart) shows that this dividend-paying ETF has done much better than the overall market since April when stocks peaked and bond yields started dropping. This ETF also includes a number of defensive market categories that pay dividends. The two biggest groups represented in the DVY are utilities (28%) and consumer goods (19%). Some of the the heaviest weighted stocks contributing the most to recent DVY strength come from the utility, telecom, and consumer service groups.
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Chart 1
DIVIDEND LEADERS ... The following five charts are taken from the biggest holdings in the DVY that show superior chart patterns (which combine absolute and relative strength). They include Entergy (utilities), CenturyLink (telecom), McDonalds (consumer services), Kimberly Clark (consumer goods), and Clorox (consumer goods). All five defensive and dividend-paying stocks have held up extremely well in the face of a weak stock market since the spring.
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Chart 2
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Chart 3
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Chart 4
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Chart 5
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Chart 6
GOLD LEADERS... In addition to dividend-paying stocks, last Thursday's article repeated the idea that gold stocks usually do well in a deflationary environment, and showed the recent upturn in that defensive group. Two of the top performing gold stocks are Eldorado Gold and IAMGOLD. Chart 7 shows EGO already trading at a two-month high, while Chart 8 shows IAG doing the same. Chart 9 shows the relative strength lines of both gold leaders measured against the GDX. Both RS lines are rising which shows upside leadership by those two stocks within the gold group.
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Chart 7
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Chart 8
Chart 9
WHY CLOSING PRICES ARE IMPORTANT... In my August 5 message on point & figure trading, I explained that I require that prices actually "close" at a buy or sell point to trigger a valid signal (even though p&f signals are based on "intra-day" prices). The reason I do that is to help prevent short-term whipsaws. We had a good example of that happening yesterday in the CBOE Volatility (VIX) Index. Chart 10 shows the VIX hitting 28 on an intra-day basis yesterday which would normally trigger a volatility buy signal. The daily bars in Chart 11, however, show the VIX suffering a downside reversal day after hitting 28 during the day. Based on the "closing" criteria which I prefer, the VIX did not trigger a p&f buy signal. That's why I use the closing criteria instead of just intra-day prices. It helps prevents the types of short-term whipsays that we saw in the VIX yesterday.
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Chart 10
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Chart 11
STOCK INDEX BOUNCE ... The falling VIX is helping to support a stock market rebound today. The hourly bars in Chart 12 show the S&P 500 regaining about a third of its August selloff. The vertical Fibonacci lines show where overhead resistance might be expected.
