DEFENSIVE SECTORS CONTINUE TO ATTRACT NEW MONEY -- THAT INCLUDES HEALTHCARE, STAPLES, AND UTILITIES -- MORE UPSIDE BREAKOUTS -- WEAKNESS IN SILVER STOCKS WARNED OF SILVER BREAKDOWN -- SILVER TRIGGERS SHORT-TERM SELL SIGNAL
NEW SECTOR LEADERS ARE DEFENSIVE ... I've written before about the shift in market leadership away from former leaders -- like energy -- into defensive groups like staples and healthcare. We can add utilities to that defensive list as well. Chart 1 shows the "relative" performance of those four sectors compared to the S&P 500 (flat black line). From last August to this February, energy stocks led the market higher while healthcare, staples, and utilities lagged behind. That's normal during a market uptrend. One of the signs that investors are turning more cautious is when those relative trends reverse. The chart shows energy stocks starting to underperform since the start of April. It also shows new leadership emerging in the three defensive sectors during February. Over the last month and week, healthcare, staples, and utilities have become the three strongest market sectors. Those three groups also happen to pay dividends which offers some downside protection against a market correction. The defensive rotation is also a warning that investors may be losing some confidence in the market as a whole which may be in need of some correcting or consolidation. Arthur Hill explained yesterday that seasonal trends turn less favorable from May until October.
Chart 1
ELI LILLY BREAKS OUT -- ABBOTT LABS MAY BE NEXT ... Healthcare has become the market's strongest sector. I've been focusing primarily on big pharma stocks that have led that resurgence. Some of the pharma leaders that I've shown achieving bullish breakouts include Bristol Myers Squibb, Johnson & Johnson, and Pfizer. Here are two more. Chart 2 shows Eli Lilly having cleared its October high to reach a new three year high. Abbott Labs may be the next drug stock to achieve an upside breakout. Chart 3 shows ABT challenging its October intra-day high at 52.75. The stock has already broken the upper line in a bullish "symmetrical triangle" that started forming more than a year ago. That greatly increases the odds for an upside breakout. Notice that both relative strength lines (below charts) started rising during February after dropping throughout most of 2010.
(click to view a live version of this chart)
Chart 2
(click to view a live version of this chart)
Chart 3
MORE STAPLE BREAKOUTS ... Last Tuesday's message showed three consumer staple stocks achieving upside breakouts. The three were General Mills, Heinz, and Pepsico. Chart 4 shows all three continuing their uptrends this week. Chart 5 shows Colgate Palmolive (blue line) and Kimberly Clark (black line) hitting new 52-week highs this week. Chart 7 shows today's upside leader in the group which is Avon Products. Its 5% gain has pushed the stock to a new six-month high. Its relative strength line (below chart) has just started to rise. There's usually a reason why investors start buying defensive stocks like these. A search for dividends may be one reason. I suspect another is that they're trying to protect themselves against the increased odds for a market pullback.
Chart 4
Chart 5
(click to view a live version of this chart)
Chart 6
SILVER STOCKS LEAD COMMODITY LOWER ... Part of last Tuesday's message was the headline "Breakdown in Silvercorp Metals Warns of Silver Peak". Earlier that day, I issued the same negative warning on Silver Wheaton. The failure of both silver stocks to confirm the April move to new highs by the metal (solid line) triggered a negative divergence that warned of a silver top. The fact that both stocks had tumbled below their 50-day averages on rising volume was another negative warning. Not surprisingly, silver finally succumbed to heavy profit-taking this week.
(click to view a live version of this chart)
Chart 7
(click to view a live version of this chart)
Chart 8
PARBOLIC SELL SIGNAL IS TRIGGERED... Last Thursday's message applied the Parabolic system to Silver iShares and warned that a short-term sell signal would be triggered if prices hit a lower Parabolic SAR point. Chart 9 shows that short-term sell signal being triggered yesterday. The fact that the SLV fell below its previous week's low at 43.55 in heavy trading is another negative sign. The black ADX line on top of Chart 9 also turned down from overbought territory. All of which suggests that the short-term trend for silver has now turned down. The fact that silver had reached its 1980 peak at $50 was another reason to expect some profit-taking. Chart 10 puts the SLV pullback in better perspective. It shows it testing its 20-day moving average which has contained the uptrend since last January. Any violation of that line would signal a deeper pullback to its lower band (currently near 36) or its 50-day average near 38. Gold has held up better than silver but also appears ripe for some profit-taking. Arthur Hill showed the US Dollar in an oversold condition yesterday. Needless to say, any short-term bounce in the dollar would put downside pressure on precious metals.
(click to view a live version of this chart)
Chart 9
