HEALTHCARE AND UTILITIES LEAD -- BOMBAY SENSEX TESTS MID-FEBRUARY LOWS -- BOVESPA BOUNCES OFF KEY RETRACEMENT -- PETROBRAS AND VALE FEATURE PROMINENTLY -- HANG SENG SURGES OFF SUPPORT AS SHANGHAI EXTENDS BREAKOUT
HEALTHCARE AND UTILITIES LEAD LACKADAISICAL MARKET... Link for todays video. Sector movements on Monday showed relative strength in two defensive sectors: healthcare and utilities. The third defensive sector, consumer staples, did not lead on Monday, but hit a 52-week high just last week. These three sectors represent goods and services that are needed regardless of economic conditions. We pretty much always need our toothpaste, soap, medicine, groceries and electricity. These three sectors typically show relative weakness during a broad market advance and relative strength during a broad market decline. The defensive sectors showed relative weakness the last several months because they were up less than the broader market. During periods of broad market weakness, relative strength occurs when these sectors move higher, trade flat or decline less than the broader market.
Chart 1 shows the Utilities SPDR (XLU) moving to a new 52-week high in late January and then consolidating the last several weeks. This consolidation looks like a falling flag and the ETF surged off support at 31.50 the last two days. XLU is on the verge of breaking consolidation resistance to signal a continuation higher. The indicator window shows the Price Relative, which is the XLU:SPY ratio. Utilities show relative strength when the ratio rises and relative weakness when the ratio falls. XLU outperformed from June to late August, which was a relatively soft period for the stock market. The Price Relative peaked at the end of August and moved lower the last six months. XLU is up over the last six months, but up less than SPY, hence the relative weakness.
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Chart 1
Chart 2 shows the Healthcare SPDR (XLV) jumping around 1% with a move above 32.50 on Monday. The overall trend is clearly up as XLV broke resistance in September and moved higher the last six months. Broken resistance turned into support and this level held in January-February. A move below 31.50 would break support and argue for a correction of the big advance. The Price Relative shows XLV underperforming SPY since early July. Relative weakness accelerated from October to February, even as XLV moved higher. Even though XLV did not decline over this period, it rose less than the broader market and showed relative weakness.
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Chart 2
Chart 3 shows the Consumer Staples SPDR (XLP) hitting a new 52-week high just last week. The ETF pulled back after this high, but remains in a clear uptrend overall. Broken resistance turned into support around 28.75-29 and held in January-February. This is the level to watch for signs of weakness going forward.
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Chart 3
BOMBAY SENSEX TESTS MID-FEBRUARY LOWS... On February 9th, I profiled four indices from the BRIC countries (Brazil, Russia, India and China). Russia remains by far the strongest of the four. The other three established support zones with bounces in mid February, but declined with the rest of the world last week. Also note that Brazil, China and India have been underperforming the developed world since October-November. Is this just a correction or will relative weakness in these emerging markets pull the developed markets lower? A bounce or successful support test would bode well for these emerging markets and the developed markets.
Chart 4 shows the India Sensex Index ($BSE) overshooting support around 17.75K in early February, but then rebounding quite sharply with a surge above 18.50K on February 18th. Broken resistance, the August consolidation and the 62% retracement marked support in the 17.75K area. As with the rest of the world, the Sensex pulled back sharply last week and then firmed on Friday-Monday. The trend since November remains down with key resistance now at 18.75K. A break above this level is needed to forge a higher high that would reverse the downtrend and put India back in bull mode.
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Chart 4
BRAZIL BOVESPA BOUNCES OFF KEY RETRACEMENT... The Bovespa Index ($BVSP) also peaked in November and Brazilian stocks have shown relative weakness for some six months. After a rather sharp decline to 64K, chart 5 shows the index rebounding near the August low and 62% retracement mark. This bounce carried the index to its early February high and then stalled. Follow through above the February highs would be quite positive. The indicator window shows the index relative to the S&P 500 ($BVSPO:$SPX). Brazil outperformed from mid May to late August as the Price Relative rose. The Price Relative stalled in September and turned lower in October as relative weakness took hold.
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Chart 5
PETROBRAS AND VALE FEATURE PROMINENTLY IN BOVESPA... Whats in an index? It is important to know the driving forces (stocks) in a particular index, especially indices (and ETFs) that are dominated by a few stocks. Two stocks account for around 24% of the Brazilian Bovespa Index ($BVSP). Vale Corp (VALE), a large diversified metals and mining company, accounts for around 12%. Petrobras (PBR), a big integrated oil and gas company, accounts for around 12% as well. Those interested in the Bovespa should also watch these two, which happen to trade as ADRs in the US. You can read more (in English) on the Bovespa website (www.bmfbovespa.com)
Chart 6 shows Pretrobras breaking channel resistance and moving above its November high with a surge in late December. Broken resistance turns into support around 35-36. This breakout is considered bullish until proven otherwise. There is some concern because the stock formed a rising channel that retraced 62% of the March-May decline. The pattern and the retracement are typical for corrective rallies. For now, the channel is bullish as long as it holds. A move below key support at 35 would be bearish.
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Chart 6
Chart 7 shows Vale do Rio Doce (VALE) bottoming in July and recording new 52-week highs in January. The stock weakened over the last few weeks and tested support around 33. The July trendline and mid February low mark support here. A break below 33 would be bearish for VALE and weigh on the Bovespa.
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Chart 7
HANG SENG SURGES OFF SUPPORT AS SHANGHAI EXTENDS BREAKOUT... Chart 8 shows the Hong Kong Hang Seng Index ($HSI) surging off support around 22.5K for the second time this month. Even though a lower high formed in January, the overall trend is still up because the index has yet to break support around 22.5K and forge a lower low. Todays 1.42% move reinforces support in this area. Follow through above last weeks high would further the bullish case and argue for further strength.
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Chart 8
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Chart 9
Chart 9 shows the Shanghai Composite ($SSEC) breaking above resistance at 2800 to reverse the downtrend that began in November. This breakout is holding and the index shows no signs of failure just yet. A move back below 2750 would be cause for concern. A break below the January low would be outright bearish.
Even though both indices are Chinese, the Hang Seng Index and Shanghai Composite are clearly two different beasts. Being Hong Kong based, the Hang Seng has a large number of banks and property developers. Of the 43 companies listed, 10 come from the finance sector and 7 come from the properties sector. The Shanghai Composite, on the other hand, is a broad index with over 800 companies. This index is much more representative of main-land China.
