GLOBAL STOCKS AND COMMODITIES SELL OFF -- BIGGEST LOSERS ARE ENERGY, MATERIALS AND UTILITIES -- LAGGING FINANCIALS AND TECHNOLOGY ROLL OVER -- MONEY MOVES TO STAPLES AND BIG PHARMA -- S&P 500 MAY BE ENTERING CONSOLIDATION PHASE
DEFENSIVE ROTATION ... Last week's messages expounded on a number of intermarket themes, which included the "new normal" relationships among the four main asset classes (bonds, stocks, commodities, and currencies). We're seeing more of that today but in the opposite direction. Stocks and commodities are selling off together (thereby maintaining their positive relationship), while bonds are rallying (thereby maintaining their inverse link to commodities and stocks). News of two more earthquakes in Japan may be partly responsible to most of today's selling. The two biggest currency gainers are the yen and Swiss franc. Today's message will address another facet of intermarket work which is sector rotation. My 2004 book on Intermarket Analysis explains that certain rotations normally take place when the market is in danger of a downside correction. To briefly review, the market is in danger of a correction when energy (and material) stocks become the strongest sectors. Normally when that happens, investors start turning more defensive and turn to groups like consumer staples and healthcare. The point of Chart 1 is to show that happening. The three lines show the relative performance of those three sectors measured against the S&P 500 (flat black line). Heading into this month, energy stocks were the market's top performer (although not shown, materials were second). Over the last week, energy and materials have reversed roles to two of the market's weakest sectors. That's usually a sign that a downside correction is starting. Another sign is relative strength in the two defensive sectors. Chart 1 shows consumer staples (red line) and healthcare (green line) starting to show new relative strength. In fact, both of those groups are this week's two strongest sectors. That's also symptomatic of a market correction.
Chart 1
ENERGY, TECHNOLOGY, AND FINANCE LEAD MARKET LOWER... The charts below show four of the day's weakest market sectors. The worst by far is energy. Chart 2 shows the Energy Select SPDR (XLE) falling below its 50-day average for the first time since last September. Its RSI and MACD lines have turned negative. Two other lagging groups that failed to particicipate in the recent rally are technology and financials. Charts 3 and 4 show the Technology SPDR (XLK) and Financials SPDR (XLF) meeting heavy resistance around their 50-day lines and rolling over today. Utilities are also being hit hard. Chart 5 shows the Utilities SPDR (XLU) falling back below its 50-day line as well. With Japan raising its nuclear alert to the highest level today, utilities are being sold because of their ties to nuclear energy.
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Chart 2
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Chart 3
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Chart 4
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Chart 5
BIG PHARMA BOOSTS HEALTHCARE... While the rest of the market is selling off, consumer staples and healthcare are holding up quite well. Chart 6 shows the Consumer Staples SPDR (XLP) actually trading higher today. Chart 7 shows the Health Care SPDR (XLV) only marginally lower. Chart 8 shows where most of the new buying is coming in healthcare. The chart shows Pharm Holders (PPH) trading near a new multi-year high. Notice the rise in their relative strength lines.
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Chart 6
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Chart 7
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Chart 8
S&P 500 MAY BE ENTERING CONSOLIDATION PHASE... Although small and midcap stocks were able to surmount their February peak, large cap stocks haven't been able to do so. Chart 9, for example, shows the S&P 500 Large Cap Index backing off from its February high near 1340. That's a normal spot to expect some profit-taking to appear. In addition, the SPX is in danger of slipping back below its 50-day average. A decisive close below that support line would signal that the rally from mid-March has run its course, and that the market may be entering a period of consolidation between its February high and March low. The green line is the 100-day average which halted the March decline. That's another important support line to watch. Needless to say, it's important that those support levels hold in order to prevent a more serious downturn.
