SECTOR ROTATION SHOW MONEY MOVING OUT OF TECHNOLOGY AND INTO DEFENSIVE SECTORS -- APPLE WEAKNESS CONTRIBUTES TO NASDAQ SLIDE WHICH IS TESTING ITS 50-DAY AVERAGE -- SEMICONDUCTORS ALSO WEAKEN -- WALGREEN AND WALMART ARE STAPLE LEADERS
DEFENSIVE SECTOR ROTATION ... One of the ways to measure the mood of the stock market is to see what sector rotations are taking place beneath the surface. Chart 1 shows that sector rotations over the past month reflect a market mood that is turning more defensive. The four sector lines are plotted "relative" to the S&P 500 which is the flat black line. In other words, the four sector lines are relative strength ratios that measure their performance "relative" to the S&P 500. The blue line shows the Technology SPDR (XLK) leading the market higher since the beginning of the year. Technology leadership is a good thing for the market. The XLK:SPX ratio has started to drop during April, however, which shows short-term loss of that leadership. In fact, technology was this week's weakest sector. The other three lines show the relative performance of the three defensive sectors which are consumer staples (pink line), healthcare (green line), and utilities (red line). Those three sectors underperformed the S&P 500 since December as the market rallied. Notice, however, that those three relative strength ratios have turned up over the last month. In fact, utilities, healthcare, and staples were this week's three strongest sectors. That's normally a sign that investors are turning more defensive and are protecting themselves from a possible market correction.
Chart 1
NASDAQ 100 THREATENS 50-DAY LINE... I'm using the Nasdaq 100 as a proxy for the technology sector since it's dominated by that group. Chart 2 shows the PowerShares QQQ Trust (QQQ) ending the week right on its 50-day moving average (blue line). A close below that line would confirm that the technology sector has entered into a downside correction. The fact that volume picked on this week's price slide adds to the downside pressure on the QQQ. So does the fact that the 14-day RSI line (above chart) has slipped below 50, and the MACD lines (below chart) have turned negative for the first time this year. The next logical downside target for the QQQ is its early March low near 63. That support level also concides with a 38% retracement level measured from the December low to the March high (see horizontal line at 38%). One of the reasons for this week's Nasdaq selling is a downside correction in Apple which is the biggest stock in the QQQ. Chart 3 shows Apple (AAPL) falling this week on rising volume and also threatening its 50-day line. Another reason is heavy selling in semiconductor stocks which were this week's weakest group. Chart 3 shows the Market Vectors Semiconductor ETF (SMH) having already fallen below its 50-day line on rising volume. The SMH:SPX ratio (top of chart) shows relative weakness in that key technology group. That increases the odds for a deeper correction in the technology sector and the rest of the market. Some money coming out of technology is moving into defensive groups.
(click to view a live version of this chart)
Chart 2
(click to view a live version of this chart)
Chart 3
(click to view a live version of this chart)
Chart 4
DEFENSIVE SECTORS BOUNCE ... Utilities were the week's top sector. Chart 5 shows the Utilities Sector SPDR (XLU) closing back above its 50-day line on rising volume. The XLU/SPX ratio (below chart) has been rising over the last month after falling throughout the first quarter. Chart 6 shows the Consumer Staples SPDR (XLP) trading near its yearly high. Its relative strength ratio (below chart) has also turned up. Chart 7 shows the Healthcare Sector SPDR (XLV) also trading above its 50-day line with a rising relative strength line. That's how the market correction started last spring, and increases the odds for more stock market selling this spring.
(click to view a live version of this chart)
Chart 5
(click to view a live version of this chart)
Chart 6
(click to view a live version of this chart)
Chart 7
WALGREEN AND WAL MART HAVE A STRONG WEEK... Two of the strongest stocks in the consumer staples space are shown below. The daily bars in Chart 8 show Walgreen (WAG) rising to the highest level in seven months on strong volume. It also cleared its 200-day average in the process. The stock's relative strength ratio (below chart) has broken a down trendline as well. Wal Mart had an even more impressive week. The monthly bars in Chart 9 show Wal Mart (WMT) closing at a new record high after having cleared its 2000 peak at 60.86. The gray matter on Chart 9 plots the WMT:SPX ratio. Notice that the ratio turned up during 2008 (which stocks sold off), dropped between 2009 and 2011 (when the market rallied), and is now rising. Chart 9 suggests that Wal Mart does even better when the stock market is weakening.
(click to view a live version of this chart)
Chart 8
(click to view a live version of this chart)
Chart 9
AMGEN IS A HEALTHCARE LEADER ... One of the largest stocks in the healthcare sector is Amgen. The stock was one of this week's healthcare leaders and looks very promising from a technical perspective. The daily bars in Chart 10 show Amgen (AMGN) climbing 2% on Friday on rising volume, and breaking through a resistance line drawn over its February/March highs (see circle). Its relative strength line (below chart) has turned up as well. Its longer-range chart is even more promising. The weekly bars in Chart 11 show Amgen having recently risen above its mid-2008 peak near 65 (red arrow). Since then, the stock has been consolidating between support near 65 and resistance near 69. The ability of the stock to find support at its prior breakout point at 65 is very positive, and increases the odds for an eventual upside breakout. The AMGN:SPX ratio (below Chart 11) also shows that Amgen's relative performance has been improving over the last year.
(click to view a live version of this chart)
Chart 10
(click to view a live version of this chart)
Chart 11
S&P 500 STRUGGLES WITH OVERHEAD RESISTANCE... The hourly bars in Chart 12 show the S&P 500 still in a short-term downtrend. This week's bounce met resistance along its late March low near 1391 (see trendline). One of the rules of charting is that broken support becomes new resistance on rally attempts (which is why the lines goes from green to red once the support level is broken). The S&P 500 would have to clear the red line convincingly to improve its short-term look. The fact that it ended the week on a soft note increases the odds for a retest of its April low.
