HEALTHCARE SHOWS STRENGTH AS INDUSTRIALS SHOW WEAKNESS -- XLI HITS RESISTANCE FROM SPRING HIGHS -- ENERGY BULLISH PERCENT INDEX NEARS ITS MAX -- INDUSTRIALS BULLISH PERCENT INDEX REMAINS IN UPTREND
HEALTHCARE SHOWS RELATIVE STRENGTH AS INDUSTRIALS SHOW RELATIVE WEAKNESS... Link for todays video. Todays market message will focus on sectors and show different ways to measure performance and internal strength for these sectors. First, I will show how to use the Sector PerfChart to compare all nine. Second, I will show how to use the price relative to measure relative performance. Third, I will show how to use the Bullish Percent Index and place several on one chart. And finally, we will look at the StockCharts Technical Rank (SCTR). Chartists can use all four of these tools to find the strongest sectors in the stock market.
PerfChart 1 shows the Industrials SPDR (XLI) as the second weakest of the nine sector SPDRs. As noted last week, the Utilities SPDR (XLU) is the weakest. This first PerfChart shows the absolute gain/loss for the nine sectors over the past month. Eight of nine are up. Only XLU is down. On the positive side, the Consumer Discretionary SPDR (XLY) is up the most and leading the market. This is bullish because the consumer discretionary sector is the most economically sensitive. Surprisingly, the next top performer is the Healthcare SPDR (XLV), which is up around 5% since August 21st. Big pharma stocks are leading this market as XLV records new highs on a regular basis.
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Chart 1
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Chart 2
Chart 2 shows the PerfChart on a relative performance basis. Relative performance equals the gain/loss in the SPDR less the gain/loss in the benchmark index ($SPX). The Industrials SPDR seriously underperforming because it is up much less than the benchmark S&P 500. $SPX is up over 3% and XLI is up just around 1/2%. XLI is the only offensive sector showing relative weakness. Note that the Technology SPDR (XLK), Consumer Discretionary SPDR (XLY) and Finance SPDR (XLF) show relative strength. As such, XLI looks vulnerable with the broader market overbought and ripe for a correction. XLU is also a serious underperformer, but could benefit during a broad market correction, especially if treasury yields fall (treasuries rise).
XLI HITS RESISTANCE FROM SPRING HIGHS... Seven of the nine sector SPDRs broke above their spring highs and kept pace with the S&P 500. I think we already know the two laggards. Chart 3 shows the Utilities SPDR trading well below its spring high, while chart 4 shows the Industrials SPDR hitting resistance from its spring high and pulling back sharply the last six days. XLU is showing signs of life as it surges off support from a key retracement zone. Technically, the trend for XLU is up since early June with a series of rising peaks and troughs. The June trend line marks first support and the early September low marks key support.
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Chart 3
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Chart 4
The indicator window shows the price relative (XLI:SPY ratio) trending lower since February. This is another measure of relative performance. The price relative shows the performance of XLI relative to the S&P 500 ETF. This extended downtrend reflects a long period of relative weakness and underperformance for XLI. Institutional investors look for sectors showing relative strength so they can outperform the broader market. Conversely, institutions avoid sectors showing relative weakness because this leads to underperformance.
Chart 5 shows XLI with weekly bars extending back three years. It is possible that a large inverse head-and-shoulders pattern is taking shape since January 2011 (green arcs). A break above the 2012 highs would signal a continuation of the 2010 advance. Failure to break resistance and a move below the early September low would reverse the four month uptrend. This would raise the possibility of a big double top forming in 2012. Chartists can draw arc lines by selecting this drawing tool underneath the normal trend line.
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Chart 5
ENERGY BULLISH PERCENT INDEX NEARS ITS MAX ... So far we have seen two of, at least, four tools at StockCharts.com to analyze a sector. First, the sector PerfChart compares the performance of the nine sectors. Second, the price relative (XLI:SPY ratio) can be used to show relative performance over time. These two were shown in the prior sections. Lets now look at the other two. Chart 6 shows the nine sector Bullish Percent Indices sorted by their close. Using such a table, chartists can rank BPI values to determine which sectors have the most stocks on P&F buy signals. This is like a breadth indicator that reflects internal strength or weakness. The Energy Bullish% Index ($BPENER) is by far the strongest with a 97.78% reading. This means over 95% of the energy sector stocks are on P&F buy signals (Double Top Breakouts). While this reading is certainly strong, it also signals an overbought condition because this indicator is near its maximum (it cannot exceed 100%). The BPIs for the utilities, consumer staples and finance sectors are the next strongest and above 80%. The Technology Bullish% Index ($BPINFO) is the least strong at 70.89%. This is likely because of relative weakness in the semiconductor group, which has been weak the last six days. Note that the Bullish Percent Indices can also be found near the bottom of the end-of-day Market Summary page.
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Chart 6
INDUSTRIALS BULLISH PERCENT INDEX REMAINS IN UPTREND... On an absolute basis, the Industrials Bullish% Index ($BPINDY) favors the bulls because it is well above 50%. In other words, over 50% of its components are on P&F buy signals. Chartists can also plot this line and use technical analysis on this plot. Chart 7 shows the Industrials Bullish% Index in the main window and XLI in the indicator window. The BPI line bottomed in early June and advanced along side XLI the last four months. This indicator is in a clear uptrend with the early September low marking key support. A move below this low would reverse the uptrend and suggest deterioration within the sector.
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Chart 7
Chartists can also plot and compare different Bullish Percent Indices. Chart 8 shows four BPIs as overlays using the price (same scale) feature. This feature merges the different plots on to one scale, which makes it possible to compare. In this example, I am showing the BPIs for the four offensive sectors (technology, finance, industrials and consumer discretionary). The Technology Bullish% Index ($BPINFO) has been the laggard for some time. It was the last of the four to cross above 50% and remains below the other three. The Finance Bullish% ($BPFINA) is the strongest with a reading above 80%. The indicator window shows the S&P 500 Bullish Percent Index ($BPSPX) crossing above 50% in mid June ad remaining in an uptrend this month.
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Chart 8
CONSUMER DISCRETIONARY AND HEALTHCARE HAVE HIGHEST TECHNICAL RANKS... Chart 9 shows a screenshot from the StockCharts Technical Rank (SCTR) for US ETFs. Of the nine sector SDDRs, the Consumer Discretionary SPDR and the Healthcare SPDR have the highest StockCharts Technical Rank (SCTR). Both are above 90% and clearly the strongest of the nine sectors. The Consumer Staples SPDR, Technology SPDR and the Basic Materials SPDR have scores above 80 and also show relative strength in this regard. Unsurprisingly, the Utilities SPDR and the Industrials SPDR are the weakest of the nine sectors. XLI has an SCTR below 35 and XLU has an SCTR below 50. Anything below 50 suggests technical weakness relative to the other ETFs.
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Chart 9
Chart 10 shows the Consumer Discretionary SPDR with the SCTR in the indicator window. The score has been above 70 most of the year, which shows some serious technical strength. On the price chart, XLY broke resistance and broken resistance turns into first support in the 45.50 area.
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Chart 10
Chart 11 shows the Healthcare SPDR with the SCTR surging back above 90. Healthcare was questionable in February-March, but the SCTR moved above 90 in April and remained strong the last six months. There was only one dip below 70 and the SCTR quickly recovered as XLV regained its technical strength. On the price chart, XLV broke resistance in early September and forged a fresh 52-week high today. You can read more about the SCTR methodology in our ChartSchool article.
