SEMICONDUCTOR SPDR CHALLENGES OCTOBER HIGH -- NETWORKING ISHARES SETS A BEAR TRAP -- ARRIS AND PALO ALTO NETWORKS LEAD NETWORKERS -- BALTIC DRY INDEX HITS THREE-YEAR HIGH -- SHIPPING ETF CONSOLIDATES WITHIN UPTREND
SEMICONDUCTOR SPDR CHALLENGES OCTOBER HIGH... Link for today's video. The broad market was weak in early trading on Tuesday, but there were pockets of strength in the tech sector. In particular, the Semiconductor SPDR (XSD) was up around 1% and trading near its October high. Chart 1 shows XSD breaking wedge resistance in late November, falling back to the breakout last week and surging with a move above 59 this week. The wedge breakout turned into support and held. A pullback to a resistance break is called a "throwback". The indicator window shows XSD starting to outperform again as the price relative (XSD:SPY ratio) broke above resistance. Renewed strength in semis is positive for the tech sector. Even though XSD is a broad-based semiconductor ETF with over 45 stocks, a good portion of the gains from the last two days can be attributed to Avago (AVGO), which is up over 15% in the last two days and up some 25% in the last four weeks. Despite this outsized contribution, note that over 20 stocks in the ETF were up 1% or more at midday. Chart 2 shows this stock breaking flag resistance in late November and gapping higher on Monday.
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Chart 1
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Chart 2
NETWORKING ISHARES SETS A BEAR TRAP... Sometimes a failed signal is as good as a signal. Chart 3 shows the Networking iShares (IGN) hitting resistance near the September trend line and breaking wedge support with a sharp decline last week. This break did not last long as the ETF surged back above 30.50 the last three days. A failed support break is also known as a bear trap. IGN is once again poised to challenge the channel trend line and attempt a breakout. The indicator window shows IGN starting to outperform as the price relative breaks above the November high.
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Chart 3
ARRIS AND PALO ALTO NETWORKS LEAD NETWORKERS... The Networking iShares, which is also known as the Technology-Multimedia Networking Index Fund, has 24 stocks and the top six account for around 50% of the ETF (MSI, QCOM, JNPR, FFIV, CSCO, HRS). Two smaller components, however, seem to be the true leaders in this ETF. Arris Group (ARRS) and Palo Alto Networks (PANW) each account for around 3.5% of IGN. Don't let the small weightings fool you. Chart 4 shows Arris gapping up at the end of October and surging over 30% the last two months. Chart 5 shows Palo Alto Networks breaking resistance with a big move in mid November and moving to new highs this month.
So why am I telling you about these stocks after such big moves? Because these stocks show some serious relative strength and they could be winners again in 2014. In his book, What Works on Wall Street, James O'Shaughnessy notes that investors can outperform the market by buying the 50 stocks with the highest relative strength from the prior year. This is a form of momentum investing that seeks to ripe the winners. I realize that many of these stocks are overbought and ripe for a correction, which could come in 2014. This makes them good candidates for the 2014 watch list, just in case we get that correction.
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Chart 4
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Chart 5
BALTIC DRY INDEX HITS THREE-YEAR HIGH... John Murphy highlighted the big breakout in the Baltic Dry Index ($BDI) in his Market Message on September 12th and this shipping barometer extended its gains with a three year high in December. The index represents a US Dollar price that a customer pays on the Baltic Exchange to ship raw materials. Chart 6 shows this index hitting a new low in early 2012, basing for over a year and breaking out in the third quarter. The breakout and rising prices suggest that shipping demand is increasing, shipping supply is decreasing or both. Judging by the surge, it appears that demand for shipping has increased dramatically and this should be positive for dry bulk shippers. The index was north of 10,000 prior to the financial crisis and stock market plunge in 2008. While a move back above 10,000 is unlikely anytime soon, this index could get back to the 3000-4000 area in 2014.
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Chart 6
SHIPPING ETF CONSOLIDATES WITHIN UPTREND... Chart 7 shows the Guggenheim Shipping ETF (SEA) hitting a new high in September and then consolidating the last three months. The ETF does not, however, have a strong correlation with the Baltic Dry Index. This is because SEA contains a lot of "non dry-bulk" shipping stocks. The top holding, A.P. Moller Maersk Group is a Danish conglomerate that is the largest container ship operator in the world. With a 20+ percent weighting, the price of the Shipping ETF (SEA) is quite dependent on the the performance of Maersk.
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Chart 7
DRY SHIPS, DIANA AND NAVIOS LEAD MARKET IN 2013... The surge in the Baltic Dry Index has not been lost on the leading dry shippers though. Dry Ships (DRYS), Diana Shipping (DSX) and Navios Maritime (NM) were some of the best performers in 2013. The long-term trends are up for these stocks and continued strength in the Baltic Dry Index would benefit these in 2014. Keep in mind that these are low-priced stocks and low price translates into above-average volatility and risk. Chart 8 shows DRYS breaking out in September, pulling back in October and resuming its advance with a breakout in November.
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Chart 8
Chart 9 shows DSX more than doubling from its 2012 low to its 2013 high. The stock formed a falling flag/channel the last three months and broke the upper trend line with a surge above 12 this month.
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Chart 9
Chart 10 shows NM with a huge move in 2013 as the stock almost tripled. The Raff Regression Channel defines this uptrend with support in the 6.5-7 area. Admittedly, this stock is a bit overextended after a big run and could be due for a correction of sorts. The September-October consolidation marks the first support zone to watch in the 7-7.5 area.
