WILL THE STRONGEST SECTOR IN THE FIRST HALF REPEAT? -- WATCHING TREASURY YIELDS FOR CLUES ON UTILITIES -- 10-YR TREASURY YIELD CHALLENGES RESISTANCE ZONE -- INVESTORS INTEL BULLISH SENTIMENT HITS AN EXTREME -- CITRIX BREAKS OUT TO CONFIRM REVERSAL PATTERN

WILL THE STRONGEST SECTOR IN THE FIRST HALF REPEAT?... Link for today's video. The utilities sector is the strongest of the nine sectors so far this year. This is true for the sector SPDRs, which are weighted by market cap, and the equal-weight sector ETFs. Chart 1 shows the year-to-date performance for the nine sector SPDRs and the Utilities SPDR (XLU) is up over 13%. The Energy SPDR (XLE) is the only other sector up double digits, but it is still up much less Chart 2 shows the nine equal-weight sector SPDRs and the Equal-Weight S&P 500 ETF (RSP). The Equal-weight Utilities ETF (RYU) is leading the first half with a 14.52% gain so far this year. The Equal-weight Energy ETF (RYE) and Equal-weight Healthcare ETF (RYH) are in second place.

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Chart 1

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Chart 2

WATCHING TREASURY YIELDS FOR CLUES ON UTILITIES ... Chart 3 shows the Utilities SPDR (XLU) advancing from 37 in early January to 43.5 in late April, pulling back in May and then challenging this high in early June. The advance in the first half of the year is strong for any sector, especially a "boring" sector like utilities. Will utilities lead again in the second half of 2014? The overall trend is clearly up, but top pickers are circling the wagons as a potential double top takes shape. The June lows mark upswing support at 42.5. A break below this level would reverse the four week upswing and put in a peak near 43.5. The mid May low marks double top support and this pattern would be confirmed with a break below this level.

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Chart 3

Second half performance for the utilities sector could depend on interest rates because utilities were negatively correlated with Treasury yields this year. Notice how XLU advanced as the 10-YR Treasury Yield ($TNX) declined from January to May. Utilities benefit from falling rates because they have high debt levels and lower rates translate into lower interest payments. Lower Treasury yields also make utilities more attractive in the hunt for yield. An advance in the 10-YR Treasury Yield, therefore, could put downward pressure on utilities and put the double top into play. Chart 4 shows the Equal-weight Utilities ETF (RYU) with similar characteristics. XLU and RYU were up fractionally at midday on Tuesday.

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Chart 4

10-YR TREASURY YIELD CHALLENGES RESISTANCE ZONE... Interest rates moved down in the first half of the year, but this trend could be reversing as the economy and labor market improve. Jobless claims have fallen steadily all year and Goldman Sachs upgraded their economic outlook on Monday. Chart 5 shows the 10-YR Treasury Yield ($TNX) breaking below the lows extending back to July and immediately recovering to forge a bear trap. The early June surge is impressive and follow through above resistance from the May highs would provide another signal that the five month downtrend is reversing (for yields that is). Keep in mind that yields and bonds move in opposite directions. This means an upside breakout in yields would be bearish for bonds. With utilities and yields inversely correlated, an upside breakout in the 10-YR Treasury Yield would be negative for utilities. Chart 6 shows the 30-YR Treasury Yield ($TYX) with resistance in the 3.5% area (35 on the chart). Note that Treasury yields were higher at midday on Tuesday. $TNX was around 2.64% and $TYX was near 3.465%.

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Chart 5

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Chart 6

INVESTORS INTEL BULLISH SENTIMENT HITS AN EXTREME... Before looking at these sentiment indicators, note that sentiment indicators can act like momentum oscillators. They can reach extremes and remain at extremes during strong trends. In addition, sentiment indicators are just that, indicators. They are secondary to the price action of the underlying, which is the S&P 500 in this example. Even though sentiment indicators can flash warning signs, we need to see confirmation on the price chart.

Chart 7 shows the Investors Intelligence sentiment indicators: percent bulls and percent bears. The main window shows bulls less bears using the "minus" function in SharpCharts (!IIBULLS-!IIBEARS). Simply enter the two symbols with a minus sign or hyphen in between the two. This chart goes back twenty years to show how the ranges can change over time. First, notice how the differential never exceeded +40% from 1995 to 2002. Second, the indicator never dipped below -5% during the bull run from 2003 to 2007. Third, notice how the differential moved lower and lower during the 2008 downtrend. And finally, notice how the differential moved higher and higher during the uptrend of the last two and a half years. Sentiment is clearly not static and even the extremes can change over time.

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Chart 7

Looking at the last twenty years, I would mark excessive bullishness above 40% and excessive bearishness below -5%. These extremes provided a few good warnings signs over the last twenty years. Notice how excessive bearishness foreshadowed lows during strong uptrends (1995-1998, 2010 and 2011). Excessive bullishness foreshadowed trading ranges in 2004, 2005 and 2011. A reading above +40% also preceded the 2007 peak. The two bad signals occurred in June 2003 and December 2013. We now have another bullish extreme as the bull-bear differential surged above 40% over the last few weeks. This is the second warning sign in seven months, but price action has yet to confirm because the S&P 500 remains in a clear uptrend.

CITRIX BREAKS OUT TO CONFIRM REVERSAL PATTERN... It has been a rough couple of years for Citrix (CTXS), but the stock is showing some promise with a break above the 200-day moving average and a new high for 2014. Chart 8 shows weekly candlesticks over the last two years. While the Nasdaq and Nasdaq 100 moved higher over this timeframe, CTXS worked its way lower and recorded a new low in early January. This low, however, marks what could be an inverse head-and-shoulders pattern.

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Chart 8

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Chart 9

Chart 9 shows daily bars to highlight this inverse head-and-shoulders pattern. CTXS formed the left shoulder in November-December, the head in January-February and the right shoulder in April. Neckline resistance is clear in the 63 area and this resistance zone corresponds with the 200-day. CTXS is trading above 64 in early trading on Tuesday and this means the stock is breaking out The height of the pattern (~12) is added to the breakout (63) for an upside target (~75).