RETAIL SPDR BREAKS FLAG TREND LINE WITH GAP -- CONSUMER DISCRETIONARY SECTOR HAS STRONGEST CORRELATION -- XLY STALLS AT CHANNEL TREND LINE -- NETWORKING ISHARES SHOWS RELATIVE STRENGTH -- PAYROLL TREND SUPPORTS LONG-TERM UPTREND IN STOCKS
RETAIL SPDR BREAKS FLAG TREND LINE WITH GAP... Link for today's video. It is a big week for retail stocks because retail sales for May will be reported on Thursday. The Retail SPDR (XRT) best represents the retail group and retailers are important to the consumer discretionary sector. Chart 1 shows XRT within a long-term uptrend as a rising channel unfolds. The ETF hit the upper trend line in mid May and then stalled the last few weeks. Notice that the last four weekly closes were between 77 and 78.5, which is a rather tight range. Like the rest of the market, XRT is overextended after a 30% run from mid November to mid May and ripe for a corrective period. Should a correction unfold, I would mark long-term support in the 69 area and target that area for a pullback. The March consolidation and April lows mark support here. The indicator window shows the XRT:SPY ratio hitting a new high in late May. XRT continues to show relative strength and lead the market.
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Chart 1
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Chart 2
Chart 2 shows XRT forming a falling flag the last few weeks and breaking flag resistance with a hammer and gap. This is a pretty powerful short-term pattern, but I am still wary of longer term overbought conditions. In any case, the breakout is bullish until proven otherwise. The gap zone marks the first support level to watch. A strong gap and breakout should hold. A move back into the gap zone would show cold feet. The dotted green line marks second support at 76.50, a break of which would totally negate the flag breakout and argue for a deeper pullback.
CONSUMER DISCRETIONARY SECTOR HAS STRONGEST CORRELATION TO THE S&P 500 ... What happens with retail will be important for the consumer discretionary sector. What happens to the consumer discretionary sector will be important for the overall market. Of the nine sector SPDRs, the Consumer Discretionary SPDR (XLY) shows the strongest correlation to the S&P 500. This is based on the 250-day moving average of the 20-day Correlation Coefficient. The 20-day Correlation Coefficient ($SPX,XLY) is .94 and the 250-day SMA is .92, which shows a strong positive correlation. Unsurprisingly, the other three offensive sectors also show a strong positive correlation to the S&P 500 (XLI, XLK and XLF). The three defensive sectors have the lowest positive correlation with the S&P 500 (XLV, XLP and XLU). If chartists could only watch one sector for market guidance, it would be the consumer discretionary sector.
Chart 3
XLY STALLS AT CHANNEL TREND LINE ... Chart 4 shows XLY reaching the upper trend line of a rising channel in May and stalling the last few weeks. The trend is up, but XLY is looking vulnerable to a correction that could extend to the 52 area. Any weakness in XLY would no doubt carry over into the broader market. It has not happened yet, but chartists should keep a close eye on this sector as the retail sales report nears.
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Chart 4
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Chart 5
Chart 5 shows the current challenge for traders. The big trend is up, but overbought and ripe for a corrective perod. The short-term was down, but reversed with a gap and breakout on Friday. Quite a few stock and ETF charts sport flag/wedge breakouts over the last few days. XLY is no different as a falling wedge formed from mid May to early June, and the ETF broke out with the Friday surge. This breakout is holding with the trend line break turning first support at 56. A move below 56 and back into the gap zone would question the robustness of this breakout.
NETWORKING ISHARES SHOWS RELATIVE STRENGTH ... The Networking iShares (IGN) is showing a little relative strength by holding up well during the correction of the last few weeks. Chart 6 shows IGN breaking the March trend line with a surge in May and then consolidating with a rather volatile range the last three weeks. The range established support in the 28.50 area twice and IGN just broke its May highs today. The S&P 500 ETF and Nasdaq 100 ETF, in contrast, are still well below their mid May highs. The indicator window confirms recent relative strength as the price relative (IGN:SPY ratio) broke above its May highs last week.
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Chart 6
PAYROLL TREND SUPPORTS LONG-TERM UPTREND IN STOCKS... Chart 7 shows Non-farm Payrolls ($$EMPLOY) expanding for the 32nd month straight as the Labor Department reported a 175,000 increase in non-farm payrolls for May and a revised +149,000 increase for April. Even though these numbers fall short of the 200,000 desired by some, the job market is clearly growing and this is more positive than negative. A long-term uptrend in non-farm payroll supports a long-term uptrend in the stock market. The time to worry is when the 3-month rate-of-change turns negative. Stocks and Treasuries treated this report as bullish for the economy because stocks moved higher and Treasuries moved lower on Friday-Monday.
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Chart 7
Even though non-farm payroll gets the most attention, weekly jobless claims provide a good indication of what's to come with the employment situation. Chart 8 show Jobless Claims ($$UNEMPCIN) peaking in April 2009 and trending lower over the last few years. The blue line is the 4-week moving average, which smooths this volatile data series. I would expect non-farm payrolls to continue expanding as long as this 4-week moving average remains below 375,000.
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Chart 8
SERVICES SIDE OF ECONOMY IS STRONGER THAN MANUFACTURING... Last week saw mixed results for the ISM Manufacturing Index and the ISM non-Manufacturing Index. Chart 9 shows the ISM Manufacturing Index coming in below expectations and dipping below 50 for the first time since June 2009. This index was above 54 just a few months ago. While the decline below 50 is concerning, it is just one month and the manufacturing portion of the economy is smaller than the services portion. Nevertheless, it would be nice to see this gauge tick back above 50 to reflect growth.
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Chart 9
Chart 10 shows the ISM Non-Manufacturing Index showing more strength as it hovers above 52. In fact, this key gauge has not been below 52 since early 2010. Anything above 50 favors economic growth and there are certainly no signs of weakness on this chart. Note that the last two charts were created with a user-defined index. Extra subscribers can create one user-defined index, while Pro subscribers can create up to ten.
Chart 10
