CONSUMER DISCRETIONARY AND RETAIL ETFS STILL LEADING -- FINANCE SPDR HOLDS SUPPORT AND CHALLENGES RESISTANCE -- HOME CONSTRUCTION ETFS SURGE ABOVE FEBRUARY HIGHS -- IYT CORRECTS WITH FALLING FLAG PATTERN -- COPPER HITS RESISTANCE WITH RISING WEDGE
CONSUMER DISCRETIONARY AND RETAIL ETFS STILL LEADING... Link for todays video. Even though stocks are still overbought and ripe for a pullback, it is hard to imagine a broad market correction unfolding as long as the Consumer Discretionary SPDR (XLY) and the Retail SPDR (XRT) are leading the market. As the most economically sensitive sector, relative strength in the consumer discretionary sector bodes well for the economy and the stock market. Retail spending drives some two thirds of GDP and leadership from this industry group also bodes well for the economy. Chart 1 shows XLY hitting a 52-week high today. After taking a hit on Tuesday, the ETF bounced back immediately with a surge the last three days. This move establishes first support and a break below this support level would argue for a correction. The indicator window shows the Price Relative (XLY:SPY ratio) breaking out in late February and hitting a new high this week.
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Chart 1
The Retail SPDR is a broad-based ETF that consists of some 95 retail stocks. This is as good of a cross-section for American retail as you will find anywhere. The largest component (Winn Dixie) accounts for 1.71% of the ETF, while the smallest component weighs in at .52%. It is not dominated by a handful of large retailers. Chart 2 shows XRT hitting a 52-week high today as well. This ETF was barely affected by Tuesdays sharp decline and moved back above 60 on Thursday. The Price Relative (XRT:SPY ratio) also broke above its 2011 highs over the last few weeks. Again, a broad market correction is hard to imagine as long as XRT leads and holds above its early March low.
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Chart 2
FINANCE SPDR HOLDS SUPPORT AND CHALLENGES RESISTANCE... The Finance SPDR (XLF) declined with the rest of the market on Tuesday, but held support and surged right back to its prior highs. Chart 3 shows XLF surging from late November to early February and then trading flat the last five weeks. The lows extending back to mid February mark support at 14.40 and a break below this level would argue for a deeper correction. It aint happened yet though. As the chart now stands, XLF is showing more strength than weakness. As with XLY and XRT above, a broad market correction is hard to imagine as long as the Finance sector holds support. Should, however, XLF fail at resistance and break support, a 50% retracement of the November-February advance would extend to the 13.30 area. Notice that broken resistance also turns into support here.
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Chart 3
Regional banks are also catching a bid today as the Regional Bank SPDR (KRE) surges back towards its February high. Chart 4 shows KRE recovering after its minor support break and surging back above 27 on Friday. With this move, chartists can now set key support in the 25.5-26 area. The indicator window shows the Price Relative (KRE:XLF) moving lower since early January. Regional banks have been underperforming the big banks this year. A break above the red trendline would signal a resurgence in regional bank performance.
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Chart 4
HOME CONSTRUCTION ETFS SURGE ABOVE FEBRUARY HIGHS... We can also add the Home Construction iShares (ITB) and the Homebuilders SPDR (XHB) to the bullish mix. This means we have relative strength in the consumer discretionary and finance sectors as well as the retail and home construction groups. This is a powerful combination. Chart 5 shows ITB correcting with a falling flag and breaking flag resistance with a surge the last three days. This three week decline was wiped out in just three days and the ETF hit a new 52-week high today. Key support is now set at 13. Chart 6 shows the Homebuilders SPDR also exceeding its February high and forging a new 52-week high today.
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Chart 5
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Chart 6
IYT CORRECTS WITH FALLING FLAG PATTERN... Despite leadership and new 52-week highs from several key groups, a few other key ETFs recently broke support and there appears to be a stealthy correction underway. Note that the Russell 2000 ETF (IWM) broke support last Friday, the Transport iShares (IYT) has been edging lower since early February, the Semiconductor HOLDRS (SMH) broke support on Tuesday and the Networking iShares (IGN) has been moving lower since mid February. Even though these ETFs represent important groups and relative weakness is troubling, chartists should try to assess market evidence as a whole, not cherry pick evidence to support a particular bias. On the whole, I would say there are more signs of strength than weakness in the market right now. Chart 7 shows the Transport iShares peaking in early February and falling the last 4-5 weeks. The pattern looks like a falling flag and support from broken resistance is coming into play around 90. Despite a bullish pattern and support, the flag is still falling and the five week trend is down. At the very least, a break above the upper trendline (93) is needed to signal a continuation higher. The indicator window shows IYT seriously underperforming the market since early February.
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Chart 7
COPPER HITS RESISTANCE WITH RISING WEDGE... Copper and the stock market have been positively correlated for most of the past year. This means they rise and fall together, which makes sense because both are tied to the economy. Copper is also quite tied to the Chinese economy because this is where much to the demand originates. Chart 8 shows Spot Copper ($COPPER) rising from early October until mid February, which coincides nicely with the rise in the Russell 2000. The advance in copper is running into some resistance though. Notice that a rising wedge formed as copper retraced 61.80% of the prior decline and hit resistance near broken support. This puts copper at an interesting juncture. For now, copper is holding up and I do not see anything negative just yet. A break below the February lows, however, would be negative and a wedge break would be bearish. This would suggest falling demand for copper and softness in the global economy, both of which could weigh on US stocks. It has yet to actually happen though. Chart 9 shows the Copper ETF (JJC) consolidating the last two months and getting a nice bounce off support the last three days. Chart 10 shows the Base Metals ETF (DBB) for reference.
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Chart 8
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Chart 9
