SEMICONDUCTORS LEAD TECHS LOWER -- INDIVIDUAL CHIP LOSERS INCLUDE INTEL, TXN, AND ALTERA -- BIG PHARMA CONTINUES TO RALLY -- MERCK IS HEALTHCARE LEADER -- TECH-DOMINATED NASDAQ 100 LEADS MARKET LOWER AND HEADS TOWARD 200-DAY LINE
REITS ARE BIG DIVIDEND PAYERS ... Last Tuesday's message focused on dividend paying stock groups that usually do better in a climate of falling bond yields and an uncertain stock market. Those groups included staples, healthcare, telecom, and utilities. Don't forget about Real Estate Investment Trusts (REITS). That stock group also pays big dividends, and has historically had a relatively low correlation to the rest of the stock market. REITs deal mainly in commercial properties like hotels, retail and industrial property, and apartment complexes. Rising rents have given a boost to the last category. REITs fall somewhere in between bonds and stocks as an alternate asset class. And they've held up very well this year. Chart 1 plots the Vanguard REIT VIPERs (VNQ) which is the largest ETF in that category. The chart shows VNQ in the process of testing its spring high. Its relative strength ratio (below chart) has been rising all year. Those gains have come in the face of a weaker S&P 500 (lowest line) and falling bond yields.
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Chart 1
BIG PHARMA RISES WHILE CHIPS FALL ... One of the reasons that we stress sector and industry groups performance is because they do different things at different times. Sometimes they trend in opposite directions. That's why it's important to be in the winners and out of the losers. Chart 2 shows two cases in point. The chart plots three lines over the last 52 weeks. The top blue line is the Market Vectors Pharmaceutical Holders (PPH) which has been rising throughout the past year. The red line is the Market Vectors Semiconductor Holders (SMH) which has been falling since March. The black line is the S&P 500. When dealing with market groups, relative strength is the best way to compare their performance. Chart 3 plots the relative strength of those two groups compared to the S&P 500 (flat zero line). Their diverging performance since February is much clearer. Drug stocks have outperformed while chip stocks have underperformed. Since February, the PPH has risen 12% versus a -10% loss for the SMH. The S&P 500 has gained 1%. Their diverging trend is also symptomatic of a weakening stock market and economy (along with falling bond yields). Drug stocks are defensive stocks that pay dividends. They do better in that weaker climate. Chip stocks are more economically-sensitive which do worse in a weakening global climate.
Chart 2
Chart 3
MERCK REACHES FIVE-YEAR HIGH... Merck is the day's top performer in the healthcare sector, and is a good example of the uptrend in big pharma stocks. The weekly bars in Chart 4 show Merck (MRK) having broken through its early 2010 high earlier this year before resuming its new uptrend over the last month. Today's strong action is pushing the drug stock to the highest levels in nearly five years. Its relative strength line (below chart) is breaking out as well.
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Chart 4
SEMICONDUCTOR STOCKS ARE TUMBLING... In sharp contrast to rising drug stocks, chips stocks are falling sharply. Chart 5 shows the Semiconductor Holders (SMH) tumbling today to put them in striking distance of their June low. The SMH is below both moving average lines. Even worse, the blue 50-day line is crossing below the 200-day line which a bearish sign (called a death cross). The relative strength line (below chart) is falling to the lowest level this year.
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Chart 5
BIG CHIP LOSERS... A number of big chip stocks are sustaining big losses and suffering serious chart damage. The next three charts show three of the biggest holdings in the SMH. Chart 6 shows Intel (the biggest SMH holding) falling beneath its 200-day line (red circle) and in danger of hitting the lowest level of the year. Chart 7 shows Texas Instruments (TXN) on the verge of a new nine month low. Its moving averages are decidedly bearish. Chart 8 shows Altera (ALTR) falling to the lowest level since last October. That kind of selling in chip stocks is bad for the stock market, and especially for the tech-dominated Nasdaq market.
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Chart 6
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Chart 7
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Chart 8
NASDAQ 100 LEADS MARKET LOWER... The Nasdaq 100 represents the largest non-financial stocks in the Nasdaq market, and is dominated by technology stocks. It's also leading the rest of the market lower today (with a lot of help from semiconductors). Chart 9 shows the Power Shares QQQ Trust falling back below its blue 50-day line and heading for a retest of its red 200-day line. That will be a very important test for it and rest of the market. The relative strength line (below chart) shows the QQQ underperforming the S&P 500 since April and near a new low for the year. It's not a good sign for the stock market when the Nasdaq is leading it lower. Money continues to flow out of stocks and commodities and into bonds and the U.S. Dollar.
