AUTOS ARE NOW THE STRONGEST PART OF DISCRETIONARY SECTOR -- FORD AND GM ARE TESTING 2012 HIGHS -- VOLKSWAGEN TRADES AT THREE YEAR HIGH -- TOYOTA GETS BIG BOOST FROM WEAK YEN -- RETAILERS WEAKEN AS S&P 500 FALLS BELOW 50-DAY LINE
CONSUMER DISCRETIONARY SPDR HAS LED ALL YEAR... The market's two strongest sectors during 2012 have been financials and consumer discretionary. After hitting a new record high earlier this month, the Consumer Discretionary SPDR (XLY) has started to slip a bit, but is still holding up better than the rest of the market. It would have to fall below its (blue) 50-day average to signal more serious profit-taking. When looking at the XLY, it's useful to look beneath the surface to see which groups have been leading it higher and which are weighing on it. The best way to look inside the nine sectors is by using the Sector Summary page. That breaks the nine market sectors into their various industry groups. By clicking on the "one year" time span, you'll see the Consumer Discretionary SPDR in second place with a gain of 22% for the year. By clicking on the Consumer Discretionary SPDR, you'll see the top industry group to be homebuilders (+81%). That's the group that has led the XLY higher for most of the year. If you change the time span to "three months", however, you'll see that autos have been the strongest industry group during the fourth quarter. By contrast, retailers have been the weakest group. Let's look at the autos.
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Chart 1
AUTO GROUP SHOWS NEW LEADERSHIP... Chart 2 shows the Dow Jones US Automobiles Index ($DJUSAU) rising sharply since August and in the process of challenging its spring 2012 high. The auto relative strength (gray) line has also been rising since August. Autos have been the strongest part of the consumer discretionary group during the fourth quarter, and have taken over leadership from homebuilders. Despite its recent improvement, the auto index is still in a sideways pattern between its 2011-2012 lows and its early 2012 high. It would have to exceed its spring high to signal the start of a new uptrend. But it's a group worth paying attention to.
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Chart 2
FORD AND GM TEST EARLY 2012 HIGHS... Ford Motor (F) has been the top auto percentage gainer over the last quarter. Chart 3 shows Ford surging since its August bottom and on rising volume. It relative strength ratio (below chart) has been surging as well. The stock has now reached chart resistance at its first quarter highs (near 12.75) where some profit-taking is being experienced. That's not unusual after such a sharp rebound (especially with the rest of the market under pressure). An eventual close above its spring high, however, would be a very positive sign for Ford. Chart 4 shows General Motors (GM) in a similar situation. GM is challenging its spring high around 27. It too is meeting some resistance near its first quarter high.
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Chart 3
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Chart 4
VOLKSWAGEN HITS THREE-YEAR HIGH ... Several foreign auto companies are doing better than those in the U.S. The strongest chart pattern belongs to Volkswagen (VLKAY). [This stock is traded on the OTC market which may effect its liquidity]. Chart 5, however, shows Volkswagen (solid line) surging to a three-year high. The German auto maker is most likely drawing strength from the stronger performance of German stocks during the fourth quarter. The dashed line plots a "ratio" of German iShares (EWG) to the S&P 500. That relative strength ratio has been rising since August. That was right around the time that Volkswagen shares started to break out to the upside.
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Chart 5
TOYOTA BENEFITS FROM RISING JAPANESE SHARES AND WEAKER YEN ... Another foreign stock that's starting to do better than U.S. automakers is Toyota (TM). Chart 6 shows the Japanese car maker trading at the highest level since the first quarter of 2011, and now challenging that resistance around 93. Toyota is getting an additional tailwind from the recent surge in the Japanese stock market helped by a falling yen. The green line below the chart shows the yen falling to a 27-month low against the dollar. A falling yen is especially helpful for Japanese auto exports, and has given Toyota a big year end boost. The orange solid line below Chart 6 shows a "ratio" of Toyota divided by the S&P 500 jumping sharply since October. The falling yen has a lot to do with that.
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Chart 6
RETAILERS WEIGH ON MARKET ... Retailers have become one of the weakest parts of the consumer discretionary sector and the market. Chart 7 shows the S&P Retail SPDR (XRT) failing dangerously close to its 200-day moving average. The red line on top of chart shows the XRT/SPX ratio falling throughout the month of December. That's weighing on the rest of the market.
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Chart 7
S&P 500 FALLS BELOW 50-DAY LINE... Chart 8 shows the S&P 500 in danger of closing below its (blue) 50-day average for the first time in two months. The fact that the 50-day is itself falling is another dangerous sign. Daily MACD lines (below chart) are also turning negative for the first time since late September. To make matters worse, the VIX is finally turning up.
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Chart 8
VIX INDEX TURNS UP ... Two Thursdays ago (December 13) I suggested keeping a close eye on the CBOE Volatility (VIX) Index. That's because an upturn in the VIX (called the fear gauge) is usually associated with a market downturn. Chart 9 compares the VIX to the S&P 500 over the last eighteen months, and shows both lines trending in opposite directions. Turns in the VIX usually coincide with turns in the S&P 500 in the opposite direction (see arrows). The last upturn in the VIX took place during spring 2012 and pushed stocks lower. To the bottom right, the VIX is now trading at the highest level in five months and is moving above 20 for the first time since July (see circle). An upside breakout would be bearish for stocks. The VIX measures volatility in the S&P 500 which is now starting to rise. The Nasdaq 100 Volatility Index ($VXN) is also starting to rise. Chart 10 shows the VXN trading above its October peak. That's a bad sign for the Nasdaq market.
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Chart 9
