TECHS, INDUSTRIALS AND FINANCE LAG -- TECH SPDR CONSOLIDATES AT SUPPORT -- CONSUMER STAPLES HIT 52-WEEK HIGH -- 20+ YEAR T-BOND ETF FORMS INVERSE HS PATTERN -- 7-10 YEAR T-BOND ETF HOLDS WEDGE BREAK -- 10-YEAR TREASURY YIELD TESTS BREAKOUT
TECHS, INDUSTRIALS AND FINANCE LAG FOR FOUR WEEKS... Link for todays video. The technology, industrials and finance sectors led the market higher to start the year, but these four turned into laggards the last four weeks. The first S&P Sector PerfChart shows the nine sector SPDRs and the S&P 500 over the prior four-week period (January 10 to February 7). All nine sectors and the S&P 500 were up. Technology, industrials, energy and finance were up more than the S&P 500, which means they were leading and showing relative strength. Despite relative weakness in the consumer discretionary (blue), leadership in these three was enough to power the market.
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Chart 1
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Chart 2
The second S&P Sector PerfChart shows these same sectors over the most recent four-week period (February 8 to March 8). There has been a clear shift in sector performance and sector preferences. The technology, industrials and finance sectors went from leaders to laggards. These three show relative weakness because they are now down more than the S&P 500 (red). The materials sector is also lagging. Energy remained the big leader during both four-week periods. The healthcare sector went from laggard to leader in the most recent four-week period. In fact, healthcare is the second best performing sector over the last four weeks. The offensive end of the market is showing relative weakness and the defensive end is starting to show relative strength.
TECH SPDR CONSOLIDATES AT SUPPORT... Recent price action in the Technology ETF (XLK) is similar to that seen in November. Chart 3 shows the ETF declining sharply to a support zone, consolidating and breaking the consolidation trendline in late November. Despite this wedge break, the ETF ultimately held the support zone and raced higher with a gap up on December 1. Flash forward to March and we see the ETF breaking the triangle trendline and immediately stalling at the bigger support zone. The trendline extending up from late September confirms support here as well. A break below the late February low would signal a continuation of the late February decline.
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Chart 3
The indicator window shows the Commodity Channel Index (CCI) consolidating in negative territory over the last few weeks. CCI also consolidated in negative territory at the end of November. In fact, there were two peaks and then a breakout surge in early December. CCI currently shows two peaks. A breakout surge into positive territory would put this momentum oscillator back on bullish footing. As the chart now stands, XLK has broken the triangle and CCI remains in negative territory. These are short-term bearish developments that call for further weakness until proven otherwise.
CONSUMER STAPLES JOINS DEFENSIVE SECTOR BREAKOUT PARADE... While three does not make for much of a parade, there are only three defensive sectors and all three recorded new 52-week highs recently. John Murphy showed the Utilities SPDR (XLU) breaking out to a new high on Tuesday. The Healthcare SPDR (XLV) hit a new 52-week high last Wednesday and is near that high today. Chart 4 shows the Consumer Staples SPDR (XLP) joining the party with a two-day surge above its 2011 highs today. Even though the sector has been underperforming the S&P 500 ETF (SPY) since late August, it was clearly not weak over the last six months. It is just less strong. XLP is up around 15% from its August low, while the SPY is up around 27% from its August low (104 to 132). The Price Relative peaked in late August and moved lower the last six months to reflect to relative weakness. The XLP:SPY ratio bounced in mid February and is now challenging the August trendline. Further strength in this Price Relative would indicate a preference for this defensive sector and this would be negative for the market overall.
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Chart 4
20+ YEAR T-BOND ETF FORMS INVERSE HS PATTERN... US Treasury bonds caught a strong bid on Wednesday afternoon and may be forming a medium-term low. I wrote about the breakdown in Treasuries just last week, but todays surge warrants a second look. Keep in mind that markets, charts and analysis are dynamic. New data points produce new bars or candlesticks that require a fresh look. Chartists must be prepared to change when the price action warrants a change. Chart 5 shows the 20+ year Bond ETF (TLT) in a clear downtrend since late August. This downtrend coincides with a clear uptrend in the stock market, which means bonds and stocks have an inverse correlation currently. A rise in bonds would be bearish for stocks. TLT found support near broken resistance and bounced in mid February. Resistance from the January high knocked the ETF back in early March, but TLT held above the February low. In fact, a small inverse head-and-shoulders pattern is taking shape. A break above neckline resistance would confirm this pattern and argue for a bullish reversal. The height of the pattern measures around 4 points (neckline to head). Adding the height to the neckline breakout produces a target around 96 (92 + 4 = 96).
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Chart 5
Why bonds all of the sudden? While the breakout has yet to happen, there are a few reasons for todays bid in bonds. First, rising oil prices could weigh on the economy. A slowing economy would keep the Fed on hold or put pressure on the Fed to ease further. Second, debt concerns are heating up again in Greece, Ireland and Portugal, which would spur a flight to safety. Third, there are reports circulating that Bill Gross sold all government bonds in Pimcos Total Return Fund. Perhaps his selling drove prices lower over the last several months. The market may be happy to find out he has nothing left to sell.
7-10 YEAR T-BOND ETF HOLDS WEDGE BREAK... Chart 6 shows the 7-10 year Bond ETF (IEF) with a falling wedge that bounced off the 62% retracement mark. Both the pattern and the retracement are typical for corrections within bigger uptrends. Those are mighty strong words, because a breakout here would target a move above the October-November highs. Needless to say, such a move in bonds would suggest a serious flight-to-safety or some serious concerns on the economy, both of which would be negative for stocks. First support is set at 92. Failure to follow through on todays bounce and a move below 92 would put bonds back on the downward trajectory.
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Chart 6
10-YEAR TREASURY YIELD TESTS BREAKOUT... As always, I like to check the 10-year Treasury Yield ($TNX) chart to confirm or refute findings on the Treasury Bond ETF charts. As noted above, I am not quite ready to turn bullish on bonds, which would mean turning bearish on interest rates. Chart 7 shows the 10-year Treasury Yield in an uptrend overall, but $TNX broke the steep November trendline with a sharp decline at the end of February. Broken resistance from the triangle breakout turned into support and it looked as if the breakout would ultimately hold. However, the 10-year Treasury Yield dropped sharply today. This tells us to heighten the alert status. Further weakness below 34 (3.4%) would argue for lower rates and higher bond prices.
