MOST NYSE STOCKS ARE BACK ABOVE 50-DAY AVERAGES -- NEW SECTOR LEADERS ARE IN GROWTH AREAS LIKE ENERGY, MATERIALS, INDUSTRIALS, AND TECHNOLOGY AS MONEY ROTATES OUT OF DEFENSIVE GROUPS
MOST % NYSE STOCKS ARE BACK ABOVE THEIR 50-DAY AVERAGE... My market message written two weeks ago (Tuesday April 23) carried the headline that "Half of market is in a correction". I showed the % of NYSE stocks trading above their 50-day average falling below 50% during April. The situation has improved considerably since then. Chart 1 shows the index exceeding its 2013 resistance line and rising to 74%. That means that three-quarters of stocks are back above their 50-day lines, which ends the downside correction. I also pointed out that stocks in downside corrections were in economically-sensitive sectors. That situation has also improved.
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Chart 1
MARKET GOES BACK ON OFFENSE... Market leadership during the first four months of 2013 was concentrated in defensive market sectors (that pay dividends) -- consumer staples, healthcare, and utilities. My April 23 message showed the four weakest sectors to be economically-sensitive groups -- materials, energy, industrials, and technology. The four lines in Chart 2 show those four groups underperforming the S&P 500 (flat line) until mid-April. That situation has changed since then. The same four lines in Chart 3 show their much stronger performance over the last two weeks. Not only have they outperformed the S&P 500 since April 23, but they have been the four strongest market sectors. While the SPX rose 2.5%, the four strongest groups over the last two weeks have been energy (5.3%), industrials (4.5%), technology (4.4%), and materials (4.0%). [Consumer discretionary and financials also did better than the SPX]. By contrast, the three weakest groups over the last two weeks have been utilities (-1.1%), staples (-1.2%) and healthcare (-1.7%). That spring rotation out of defensive stocks into more economically-sensitive ones is a very positive development for the market as a whole. It's a much more encouraging sign for the market when economically-sensitive stock are leading it higher, and defensive groups are starting to lag behind.
Chart 2
Chart 3
ENERGY AND MATERIALS TEST 2013 HIGHS... Stocks tied to basic materials and energy were in downside corrections two weeks ago. Not anymore. Chart 4 shows the Energy Sector SPDR (XLE) trying to move above its March high. At the same time, Chart 5 shows the Materials SPDR (XLB) doing the same. After surviving tests of their 200-day averages during April, both ETFs have climbled safely back above their 50-day lines. Energy and material stocks are closely tied to views on the strength of the global economy. Upside breakouts by both groups would be a vote of optimism.
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Chart 4
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Chart 5
INDUSTRIALS AND TECHNOLOGY ARE HITTING NEW HIGHS... Two weeks ago, industrials and technology were testing chart supports along their first quarter lows. Since then, they've both broken through resistance barriers to resume their uptrends. Chart 6 shows the Industrials SPDR (XLI) breaking through its spring peak to reach an all-time high. To my mind, however, the biggest improvement has come from the technology sector. After lagging behind the rest of the market all year, Chart 7 shows the Technology SPDR (XLK) testing its first quarter lows in mid-April. Since then, it has exceeded its 2013 highs and is now testing its September peak. As I suggest recently in another market message, upside leaderhip by technology stocks is a necessary ingredient in a healthy stock market advance. So is upside leadership by other economically-sensitive stocks. For the first time this year, the market is finally getting that leadership.
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Chart 6
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Chart 7
CYCLICALS INDEX REACHES RECORD HIGH... Two weeks ago the Morgan Stanley Cyclicals Index ($CYC) was also in a downside correction and showing relative weakness. Chart 8 shows the CYC now trying to clear its March peak. In addition, its relative strength ratio (above chart) has turned up. That's important because the CYC is composed of 30 stocks in economically-sensitive groups like autos, metals, paper, machinery, chemicals and transports. It gets its name from the fact that it's tied to the ups and downs of the business cycle. That being the case, an upside breakout in this group would be an especially good sign for the U.S. economy and stock market. Chart 9 shows the MS Cyclicals Index also breaking through its 2007 and 2011 peaks to reach a new record high.
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Chart 8
