DISCRETIONARY, FINANCIALS, AND INDUSTRIALS ARE HITTING NEW HIGHS WHICH SHOWS INVESTORS TURNING MORE OPTIMISTIC -- INDUSTRIAL LEADERS INCLUDE AIRLINES AND BUILDING MATERIALS -- AIRLINE LEADERS INCLUDE JETBLUE AND SOUTHWEST
THREE SECTOR BREAKOUTS ... Sector performance over the last month has turned more positive for the stock market. The fact that stock sectors sensitive to the economy are leading it higher is a sign of more confidence. In fact, the top three sectors are hitting new 52-week highs today and achieving bullish breakouts in the process. They include the Consumer Discretionary SPDR (Chart 1), the Financials SPDR (Chart 2), and the Industrials SPDR (Chart 3). The relative strength lines in the XLY and XLF (above charts) have been rising since the summer which shows their market leadership. The RS line for the XLI in Chart 3 turned up during October. All three are now leading the market higher. The Consumer Discretionary SPDR (XLY) is now trading at a new record high. The other two sectors are nearing impressive upside breakouts of their own.
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Chart 1
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Chart 2
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Chart 3
FINANCIAL SPDR NEARS MAJOR UPSIDE BREAKOUT... Chart 4 shows the Financials SPDR (XLF) nearing a test of its 2010/2011 highs (flat line). A close above that resistance barrier would put the XLF at the highest level in four years and would be an impressive bullish breakout. The green line is the XLF/SPX ratio. That relative strength ratio turned up a year ago (up arrow) and is now trading at the highest level in more than a year. This is the first time financials have been outperforming the broader market since 2009 and, before that, during 2006 just prior to the financial meltdown. It's normally a good sign for the rest of the market when financials are doing better. A bullish breakout by the XLF would be a strong signal for that sector and the market as a whole.
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Chart 4
INDUSTRIALS ARE TESTING 2007 HIGH ... The weekly bars in Chart 5 show the Industrials SPDR (XLI) testing highs formed during 2011 and 2007 (flat line). An upside breakout would put the XLI at a new record high and would be a very strong sign for this economically-sensitive group. Its relative strength ratio (below chart) is also consolidating below its record high. The XLI includes transportation stocks as well as industrials. In fact, airlines have been its strongest industry group over the last month. A second leading industrial group has been Building Materials & Fixtures. We'll take a look at both and some leading stocks in each.
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Chart 5
AIRLINE INDEX IS BREAKING OUT... The weekly bars in Chart 6 shows the Dow Jones US Airlines Index on the verge of breaking through its early 2012 high to achieve a bullish breakout. Its relative strength line (below chart) is about to do the same. The relatively weak price of crude oil may be contributing to the airline takeoff. Two of the strongest airlines with the most promising chart patterns are JetBlue and Southwest. The weekly bars in Chart 7 show JetBlue Airways (JBLU) breaking through the upper resistance line in a triangular formation. That's a positive sign. Chart 8 shows Southwest Airlines (LUV) breaking through its early 2012 high to reach the highest level in sixteen months. That's also a bullish breakout.
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Chart 6
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Chart 7
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Chart 8
BUILDING MATERIAL LEADERS... Building material stocks are also achieving bullish breakouts. This is most likely tied to a recovering housing sector. Three stocks in that leading group are shown below. The weekly bars in Chart 9 show Martin Marietta Materials (MLM) having just achieved a bullish breakout and trading at a two-year high. Its relative strength line (below chart) has turned up as well. Chart 10 shows Vulcan Materials (VMC) also trading at a new two-year high (see circle). Both building stocks appear to be in early stages of a new uptrend. Chart 11 shows Owens Corning (OC) trying to break out of a bullish "symmetrical triangle". [A symmetrical triangle is identified by two converging trendlines. A rise above the upper trendline is a bullish breakout].
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Chart 9
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Chart 10
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Chart 11
HOUSING RECOVERY IS A POSITIVE SIGN... Chart 12 shows the Dow Jones US Homestruction iShares (ITB) hitting a new five-year high today. The ITB hit bottom last October and broke through its 2010 high this June (see circle). It's been in a clear uptrend since then. The solid matter plots the ITB/SPX ratio, and shows the ITB outperforming the S&P 500 for the first time since 2006 when housing problems first started to surface. The ITB is in fact this year's top ETF. The revival in the housing industry is a positive sign for the U.S. economy and the stock market.
