CONSUMER CYCLICALS COMING INTO A STRONG SEASONAL BIAS -- CONSUMER CYCLICALS RELATIVE STRENGTH STARTS TO IMPROVE -- CYCLICALS START TO OUTPERFORM CONSUMER STAPLES -- CYCLICALS START TO OUTPERFORM UTILITIES -- XLY BUILDS A MOMENTUM BASE

CONSUMER CYCLICALS COMING INTO A STRONG SEASONAL BIAS... John did an indepth view of energy yesterday, and Arthur did an in depth view of the 5 major technology groups on Monday. Some of the price action I have seen this week is pointing towards some strength in Cyclicals. We will review the Cyclicals today.

Chart 1 is a 15-year, monthly bar chart of the Consumer Discretionary SPDR (XLY). It is commonly mentioned that the Consumer Cyclicals Sector is a leading indicator. However, Consumer Cyclicals usually pull back in the second quarter of the year so having a weak second quarter in Cyclicals is not unusual. When the rotation back into Cyclicals during the summer months "does not hold up" as shown by the red arrows, we are usually entering a weaker market or bear market period. In 2001,2002, 2003, 2007,2008, 2011 we had steep corrections in the broader markets. On Chart 1, you can see the red arrows are all in the down years listed with the exception of 1999 and 2005. In those two cases, the cyclical stocks didn't start rising until the 4th quarter and the July highs were only marginally taken out by December. Almost every year, mid year lows usually happen in June or July. So after this hard rotation away from cyclical stocks, now is a good time for us to analyze the market going into June. If they are going to start rising, finding strong stocks and industries after this pullback will be valuable.

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Chart 1

CONSUMER CYCLICALS RELATIVE STRENGTH STARTS TO IMPROVE... Looking over the last year on Chart 2, the Consumer Cyclical vs. the S&P 500 (XLY:$SPX) ratio has provided excellent timing clues. The chart is showing a change this week marked by the green arrow. We can see the relative strength of the Cyclicals Sector is improving compared to the S&P 500 index.

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Chart 2

CYCLICALS START TO OUTPERFORM CONSUMER STAPLES... Using a monthly ratio chart in Chart 3 to show the strength between Consumer Cyclicals (XLY) and Consumer Staples (XLP), we are at an inflection point on the charts. When the ratio is rising, Cyclicals are outperforming Consumer Staples. So far, the XLY has started to outperform XLP since May 1st. This is an early look on a monthly chart but it will be important for the Cyclicals to continue to outperform within this up trend channel.

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Chart 3

Looking on the daily ratio chart of XLY:XLP on Chart 4, we can see that we have pushed above the down trend line after coiling into a pennant pattern since late April. This breakout could be meaningful as the start of the move for strong cyclical stocks.

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Chart 4

CYCLICALS START TO OUTPERFORM UTILITIES... The other defensive sector is Utilities. The rotation into the Cyclical sector should be noticeable on this chart. We can see on Chart 5 the Utilities have underperformed almost every day this month after being the 'GOTO' sector. In a month, the Utilities SPDR ETF (XLU) is down 3.4% overall, and the S&P500 ($SPX) is up by 1%. The Consumer Staples (XLP) tracked the S&P500 while Utilities not only fell, but fell while the market was up slightly. That is a significant divergence in sentiment. I have set the chart length at 19 days or almost one month, which starts the chart close to the high of the Utilities sector outperformance.

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Chart 5

CYCLICALS START TO OUTPERFORM UTILITIES... Reviewing how Consumer Cyclicals are doing compared to Utilities is informative for deciding when the market is looking to return to growth sectors. Using the same settings for the monthly ratio chart as shown above in Chart 3, Chart 6 compares Consumer Cyclicals (XLY) with Utilities (XLU). Chart 6 shows the five year view. We can see that XLY outperformed XLU since the 2009 lows in general, but big swings occurred in the 2nd quarter every year. After running up outside the trend in late 2013, the ratio has now come back inside the trend and is continuing higher since April 30th. A bounce here at the trend line may be providing a clue for that rotation back to Cyclicals. As you can see, it is not as common to see the big pullback so early in the year. This might have a larger meaning that we will come to see over time.

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Chart 6

Zooming into the daily chart shown on Chart 7, we can see the XLY:XLU ratio is improving as it is just starting to break out from the channel. A best-fit line underlines the channel across the bottom and a parallel line marks the top of the channel as shown in gray. At this point this change in trend may be starting to occur. It is still early but the ratio is now making higher highs and higher lows since early May.

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Chart 7

XLY BUILDS A MOMENTUM BASE... With the XLY:XLU and XLY:XLP ratio charts starting to break out of the trend channel, the weight of the evidence is starting to lean to cyclicals as being a stronger sector. Confirmation with the XLY:$SPX suggests the Cyclicals are turning up against the broader average. It is still early days but establishing a shopping list is important before the big moves.

VACATION INDUSTRIES RISE UP... Focusing on the Industries within Consumer Cyclicals, Chart 8 shows the Recreational Services Industry, Travel & Tourism as well as Broadcasting and Entertainment round out the top 3 for the last week. Chart 9 shows for the last month, Toys, Recreational Services, Broadcasting & Entertainment and Hotels make up the top 4. The trend for summer vacation industries seems strong here with Recreational Services, Travel & Tourism and Hotels all near the top.

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Chart 8

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Chart 9

PRICELINE AND EXPEDIA FIND SUPPORT, MMYT BOUNCES... Priceline and Expedia have been huge out performers in the travel space over the years. They recently pulled back on their respective charts. Both are just below resistance. Priceline (PCLN) has bounced off the 200 DMA and started to outperform the $SPX as shown in purple on Chart 10. Expedia (EXPE) has not been able to start outperforming yet, but bears watching.

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Chart 10

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Chart 11

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Chart 12

MMYT MAKES TEXTBOOK CUP WITH HANDLE BASE... Make My Trip (MMYT) is a travel Site for India. After a huge pullback since the 2010 IPO, this stock is building an excellent long term Cup/Handle pattern. Chart 12 above shows the daily, but Chart 13 shows the weekly. This is a text book base with excellent price action this week.

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Chart 13

The market is trying to break out from these levels. This summer travel theme makes sense and might be a good way to find some outperformance. I will be doing a blog on the US broad line retailers (also in the Consumer Cyclicals Sector) on my 'The Canadian Technicians' Blog later today. If you are interested in that please check this tab later Thursday or Friday. The Canadian Technician.
Good trading,
Greg Schnell, CMT