MEASURING THE SECTOR SHIFT WITH PERFCHARTS -- BOND MARKET CONFIRMS CHANGE IN INTEREST RATE OUTLOOK -- XLY CORRECTS WITH A POTENTIAL BULLISH CONTINUATION PATTERN -- XLK HOLDS UP BETTER, BUT BREAKS PENNANT SUPPORT
MEASURING THE SECTOR SHIFT WITH PERFCHARTS... Link for today's video. May brought about a big change in the equity market as leadership moved from the defensive sectors to the offensive sectors. We can define this shift by comparing PerfCharts for two different timeframes. The Consumer Staples SPDR (XLP), Healthcare SPDR (XLV) and Utilities SPDR (XLU) were by far the best performing sectors for the five weeks ending on April 29th. PerfChart 1 shows XLU up over 8%, XLV up over 6% and XLP up over 4%. Meanwhile, the offensive sectors were up much less and showed relative weakness. This changed in May as the offensive sectors took charge and the defensive sectors started underperforming. Chart 2 shows XLY, XLK, XLI and XLF leading the market over the last five weeks. Relative strength in these "offensive" sector is positive for the market overall. It suggests that the economic outlook is improving because money is moving into the "cyclical" side of the stock market.
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Chart 1
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Chart 2
BOND MARKET CONFIRMS CHANGE IN INTEREST RATE OUTLOOK... The bond market also experienced a seismic shift as bonds seriously underperformed stocks the last five weeks. PerfChart 2 shows the performance for four equity ETFs and four bond ETFs for the five weeks ending April 29th. Notice that the 20+ Year T-Bond ETF (TLT) is the top performer with a 5.11% gain. Also notice that the other three bond ETFs are up. The equity ETFs were mixed with the Russell 2000 ETF (IWM) down and the other three up. PerfChart 3 shows these same eight ETFs over the most recent five week period. TLT is now the big laggard with a 7% decline that completely wiped out the April gain. Moreover, the other bond ETFs are also weak, which indicates that money is moving out of this asset class. There is only one reason for this mass exodus from bonds: the prospects for tighter monetary policy. Even though the Fed has not "officially" changed its policy, the bond market often leads the Fed and foreshadows policy changes. Keep in mind that Fed policy is dependent on job growth, which means this week's employment-related reports carry a lot of weight. Continued signs of economic strength and a strong jobs report would be bearish for bonds. A negative surprise could give way to an oversold bounce in bonds and weigh on stocks.
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Chart 3
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Chart 4
XLY CORRECTS WITH A POTENTIAL BULLISH CONTINUATION PATTERN... Even though the big picture remains positive for equities, the offensive sectors became overbought in mid May and corrected the last few weeks. Chart 5 shows the Consumer Discretionary SPDR (XLY) moving lower the last two weeks. XLY is the weakest of the four sectors because it broke below the 24-May low with Friday's decline. It is possible that a falling flag is taking shape. These are corrective patterns that form as small declines. Notice that XLY formed small corrective patterns in late December, late February and mid April. Each one ended with a breakout to signal a continuation of the uptrend. Short-term, traders should respect this flag as long as it falls. The next support resides in the 54-54.5 area. A break above the flag trend line would provide the first signal that the bigger advance is resuming.
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Chart 5
XLK HOLDS UP BETTER, BUT BREAKS PENNANT SUPPORT... Chart 6 shows the Technology SPDR (XLK) holding up better than XLY because it has yet to break its 24-May low. With a contracting range, a pennant is taking shape as the ETF works off overbought conditions. Pennants are continuation patterns that represent a rest in the ongoing trend. A break above last week's high would end the pennant and signal a continuation higher. Even though this pennant is a bullish continuation pattern, traders should be on guard for the unexpected, which may be happening today. A break below pennant support would be short-term negative and argue for a deeper retracement of the April-May advance.
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Chart 6
COPPER CONSOLIDATES AFTER EARLY MAY SURGE... The bond market and sector rotations are bullish for the stock market and the economy. Will that carry over into the commodity markets? Chart 7 shows the July Copper Futures (^HGN13) surging in early May and breaking above its late April high. This move was impressive, but we have yet to see an encore (follow through). July Copper has consolidated with support in the 3.22 area and resistance in the 3.40 area. An upside break from this consolidation would be bullish and argue for a continuation of the May surge. A break below support would keep the bigger downtrend alive. The indicator window shows RSI moving above 50 and then flattening the last few weeks. The flat movement confirms the consolidation. An RSI break above 60 would be bullish for momentum. Chart 8 shows the Copper ETF (JJC) for reference.
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Chart 7
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Chart 8
COPPER MINERS ETF TRACKS THE EMERGING MARKETS ETF... The Copper Miners ETF (COPX) has been one of the weakest ETFs in 2013. While the S&P 500 is up double digits for the year, COPX is down double digits (-21.33%). Chart 9 shows this ETF peaking in January and falling the last five months. There was a bounce in mid April, but the ETF fell back with a falling wedge the last few weeks. This wedge also retraced around 61.80% of the prior bounce. Even though picking bottoms in weak groups is dangerous, the falling wedge and the retracement amount are intriguing. A breakout at 10.75 would be quite positive and could set the stage for a bounce to the 12 area. Note that COPX is a very international ETF with some two dozen copper-related stocks. It tracks emerging markets much closer than it tracks the S&P 500. The indicator window shows the Emerging Markets iShares (EEM) rising and falling along with COPX the last eight months. Perhaps a rebound in emerging market stocks is needed to give a lift to copper and these copper stocks. COPX does include Freeport McMoran (FCX), but the stock accounts for just 5%. Chart 10 shows FCX surging to resistance in early May and then pulling back the last two weeks. First resistance is set at 32 and key resistance at 34.
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Chart 9
