ANALYZING SECTOR BREADTH -- XLY REMAINS THE STRONGEST -- DIVERGENCES FORESHADOWED SURGE IN XLF -- XLK HITS CHANNEL TREND LINE -- BREADTH CONFIRMS NEW HIGH IN XLI -- XLP BREAKS PENNANT RESISTANCE -- XLU MOVES FROM RELATIVE STRENGTH TO RELATIVE WEAKNESS

ANALYZING THE SECTOR BREADTH ... Link for today's video. Today's market message is going to dive deep into sector analysis. There are nine sector SPDRs and StockCharts.com offers four different breadth indicators to complement sector analysis. Breadth indicators are designed to measure the degree of participation. The price of the SPDR shows us what is happening on the outside, while the breadth indicators show us what is happening on the inside. Breadth confirms price most of the time, but breadth sometimes divergences and this can foreshadow a trend change. Below is a list of breadth indicators that will be used:

• AD Percent = (Advances - Declines)/Total Issues
• AD Volume Percent = (Volume of Advances - Volume of Declines)/Total Volume
• HL Percent = (52-week Highs - 52-week Lows)/Total Issues
• Bullish Percent Index = Percentage of Stocks on P&F Buy Signals

AD Percent measures aggregate performance of the 'average' stock in the SDPR. An advance counts +1 and a decline counts -1, regardless of market capitalization or volume. AD Percent can be used to create an AD Line, which is a cumulative measure of daily AD Percent values. AD Volume Percent measures aggregate performance for the volume leaders, which are usually large cap stocks. AD Volume Percent can be used to create the AD Volume Line. HL Percent can be shown as a standalone indicator or as a High-Low Line, which is cumulative. A list of these breadth symbols can be found at the bottom of this commentary.

Overall, we have seen a shift from defensive sector leadership to offensive sector leadership over the last five weeks. In particular, the consumer staples and utilities sectors have gone from leaders to laggards. The finance and consumer discretionary have been leaders in 2013 and continued to lead the way higher in May. Energy and materials show the most relative weakness this year, even though both broke out to 52-week highs this month. Despite mixed relative performance, all nine sectors are in uptrends, as are their respective AD Lines and AD Volume Lines. All High-Low Lines are above their 10-day EMA and all Bullish Percent Indices are above 70%. XLY and XLF are the strongest sectors, but both are short-term overbought and ripe for a pullback.

XLY REMAINS THE STRONGEST SECTOR IN THE MARKET... The Consumer Discretionary SPDR (XLY) is one of, if not, the strongest sectors in the market right now. Chart 1 shows the ETF hitting a fresh 52-week high after a 7+ percent surge the last four weeks. XLY might be short-term overbought, but it is clearly not weak. Broken resistance marks first support in the 54 area. The indicator windows show the XLY AD Line ($XLYADP) and XLY AD Volume Line ($XLYUDP) confirming underlying strength with new highs of their own. We have yet to see a bearish divergence or relative weakness in breadth that would hint at a significant peak right now.

Chart 2 shows the Consumer Discretionary SPDR relative to the S&P 500 ETF (SPY) using the price relative (XLY:SPY ratio). This ratio bottomed in late February and moved to new highs in March, April and May. Relative strength in the most economically dependent sector is positive for the market overall. The first indicator window shows the High-Low Line moving above its 10-day EMA in mid November and remaining above the last six months. The lower window shows the Bullish Percent Index near 90% and in a clear uptrend. I would mark support at 75% and consider this indicator firmly bullish as long as it remains above this level.

BREADTH DIVERGENCES FORESHADOWED SURGE IN XLF... Chart 3 shows the Finance SPDR (XLF) breaking out with a surge over the last four weeks. Broken resistance turns first support in the 18.50 area. The April lows mark key support at 17.75 for now. Notice that XLF formed a lower (closing) low in late April, but the AD Line and AD Volume Line formed higher lows. These bullish divergences foreshadowed the late April surge and breakout. Both the AD Line and AD Volume Line hit new highs this month to confirm the overall uptrend.

Chart 4 shows the price relative (XLF:SPY ratio) breaking out in late April and moving to a new high this month. XLF is leading the overall market and relative strength in financials is a big positive. The High-Low Line shows nothing but uptrend and the Bullish Percent Index has been strong the entire year.

XLK HITS UPPER TREND LINE OF RISING CHANNEL ... Chart 5 shows the Technology SPDR (XLK) surging to the upper trend line of a rising price channel. The ETF is overbought and ripe for a pullback now, but by no means weak. Broken resistance in the 30.50 area turns first support. The AD Line broke out in late April and hit a 52-week high to confirm underlying strength. The AD Volume Line confirmed as well. Notice that the AD Volume Line moved higher from late March to late April, even as XLK moved lower. This bullish divergence foreshadowed subsequent strength in XLK.

Chart 6 shows the price relative (XLK:SPY ratio) trending lower since September. The price relative got a bounce in late April as Apple and Microsoft moved higher, but fell back the last few days and remains in a downtrend overall. The High-Low Line is in an uptrend and bullish overall. The BPI turned up and broke the February trend line.

XLI SURGES TO 52-WEEK HIGH THAT IS CONFIRMED BY BREADTH... Chart 7 shows the Industrials SPDR (XLI) finding support near the February low and surging to new highs the last few weeks. The ETF is nearing the upper trend line of a rising channel. Broken resistance turns first support in the 41.5-42 area. The AD Line and AD Volume Line confirmed with breakouts and new highs. Notice that the AD Line held up better than XLI in April and broke resistance in late April, well before the XLI breakout.

Chart 8 shows the XLI:SPY ratio breaking down in March and falling sharply in April as XLI underperformed the market. The price relative found support in late April and broke resistance in early May as XLI returned to relative strength this month. The High-Low Line has been moving higher since late November. The Bullish Percent Index turned up and hit 90% this week.

XLP BREAKS PENNANT RESISTANCE AND HITS 52-WEEK HIGH... Chart 9 shows the Consumer Staples SPDR (XLP) extending its uptrend with a pennant breakout this week. The AD Line and AD Volume Line confirm underlying strength with new highs of their own.

The Consumer Staples SPDR was leading the market in April as the XLP:SPY ratio surged to a new high, but things changed as the price relative plunged and XLP started underperforming the last four weeks. Despite relative weakness, the High-Low Line remains in an uptrend and the Bullish Percent Index is firmly bullish.

XLU MOVES FROM RELATIVE STRENGTH TO RELATIVE WEAKNESS ... The Utilities SPDR (XLU) is the only one of the nine SPDRs that is trading below its 21-day EMA. Chart 11 also shows the 21-day EMA turning down over the last few days. The ETF surged from November to April and is ripe for a correction that could retrace a portion of this advance. The AD Line and AD Volume Line are both trading near their 21-day EMAs. I am using 21-days because there are (roughly) 21 trading days in a month.

Chart 12 shows the XLU:SPY ratio plunging below its March lows as XLU moved from relative strength to relative weakness. The High-Low Line flattened as XLU declined and new highs dried up. We have yet to see an uptick in new lows. This will take time because it takes at least 52 weeks to forge a 52-week low. The BPI has been stair stepping higher since February, but took its first step down in May.

BPI FOR XLV ESTABLISHES SUPPORT WITH TWO BOUNCES... Chart 13 shows the Healthcare SPDR (XLV) forming a small flag or wedge and holding support from the mid April low. The ETF broke out last week and surged to 49 this week. The AD Line and AD Volume Line confirm underlying strength with new highs of their own.

Chart 14 shows the XLV:SPY ratio taking a big hit from late April to early May and then rebounding the last few days. The overall trajectory remains up and the recent move back above the 21-day EMA is positive for relative strength. The High-Low Line remains in a clear uptrend and the BPI has been above 75% since mid January.

XLB HOLDS BREAKOUT AS BROKEN RESISTANCE TURNS FIRST SUPPORT... Chart 15 shows the Basic Materials SPDR (XLB) bouncing off support in mid April and breaking resistance in early May. The resistance breakout is holding as the broken resistance zone turns first support in the 39.5-40 area. The AD Line and AD Volume Line confirmed underlying strength with breakouts of their own. March-April was a strange period because the AD Line moved higher, but the AD Volume Line moved lower. Both got back on track with recent breakouts.

Chart 16 shows the XLB:SPY ratio turning up in April, but stalling the last few weeks and falling short of a breakout. XLB shows relative weakness overall. The High-Low Line dipped below its 10-day EMA in mid April, but recovered and moved to a new high. The BPI also recovered with a surge back above 70%.

BREADTH DIVERGENCES FORESHADOWED LATE APRIL LOW IN XLE... Chart 17 shows the Energy SPDR (XLE) breaking above resistance and broken resistance in the 79-80 area turning first support. The AD Line and AD Volume Line confirmed these breakouts with new highs in May. Also notice that these lines formed bullish divergences from late February to late April. XLE forged a lower low, but these two held above their late February lows and formed higher lows.

Chart 18 shows the XLE:SPY ratio falling sharply from mid February to mid April. This marked a period of serious relative weakness. The price relative rebounded the last four weeks, but I am not ready to put XLE back in the relative strength camp. The High-Low Line turned back up at the end of April and remains bullish. The BPI broke above resistance at 60 to revive this indicator.

SYMBOL LIST... Here is a list of the breadth symbols for the Sector SPDRs. Click this image to see this list in the symbol catalog.