SECTOR MAJORITY REMAINS BULLISH -- ONE KEY SECTOR IS STILL LAGGING -- LARGE-CAPS LEAD AND MID-CAPS HIT NEW HIGHS -- SMALL-CAP BREAKOUT HOLDS -- HOME CONSTRUCTION ISHARES TESTS THE BREAKOUT ZONE -- REFINERS AND THE BRENT-WTI SPREAD
SECTOR MAJORITY REMAINS BULLISH... Link for today's video. The overall picture remains bullish for stocks. Note that seven major index ETFs hit new highs this week. These include the Nasdaq 100 Equal-Weight ETF, Nasdaq 100 ETF, Russell 1000 iShares, S&P 1500 ETF, S&P MidCap SPDR, Equal-Weight S&P 500 ETF and S&P 500 SPDR. Note a bad crew at all. Also notice that five of the nine sector SPDRs hit new highs this week. The majority rules and the majority remains bullish. These sectors include technology, energy, consumer staples, healthcare and utilities. Even though four of the five are "non-offensive" sectors, the majority of sectors hit new highs this level and this is a net positive. PerfChart 1 shows the Finance SPDR, Utilities SPDR and Energy SPDR leading over the past months.
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Chart 1
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Chart 2
Seven of the nine equal-weight sector ETFs hit new highs, which is two more than the market-cap weighted SPDRs. These include technology, finance, energy, materials, consumer staples, healthcare and utilities. The equal-weight versions show even broader strength in the market. PerfChart 2 shows the Equal-weight Technology ETF, Equal-weight Utilities ETF and Equal-weight Energy ETF leading over the past month. Broad strength in the tech sector shows a healthy appetite for risk.
ONE KEY SECTOR IS STILL LAGGING... There are two sector ETFs missing from the new high groups above. The Consumer Discretionary SPDR (XLY) and the Equal-Weight Consumer Discretionary ETF (RCD) have yet to hit new highs. Chart 3 shows XLY breaking resistance in the 64-65 area with a surge in May, but falling short of a break above the early March high. I am not yet ready to call this an actual concern. It is just a "potential" concern or something to watch. The consumer discretionary is the most economically sensitive sector and relative weakness in this sector could weigh on the market. The broken resistance zone in the 64-65 area turns first support. A close below 64 would turn this "potential" concern into an "actual" concern. The indicator window shows the XLY AD Volume Line ($XLYUDP) hitting a new high this month. Chart 4 shows the Equal-Weight Consumer Discretionary ETF with similar characteristics.
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Chart 3
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Chart 4
LARGE-CAPS LEAD AND MID-CAPS HIT NEW HIGHS... I have been featuring ETFs based on the Russell indices over the last few weeks and will add the Russell Mid-cap Index ETF (IWR) to the mix today. The Russell Midcap Index is a subset of the Russell 1000, which represents the 1000 largest stocks in the Russell 3000. This means the Russell 1000 breaks down into 200 large-caps and 800 mid-caps. I like these Russell Indices because they are broad-based and cover 98% of the US equity market. Chart 5 shows the Russell 1000 iShares (IWB) hitting a new high this week to affirm its overall uptrend. Broken resistance and the late August trend line zone turn first support. The indicator window shows the Russell 1000 iShares relative to the Russell 2000 iShares, which is large-caps relative to small-caps. Large-caps outperformed from mid March to mid May, but are starting to underperform in June.
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Chart 5
Chart 6 shows the Russell MidCap iShares (IWR) in a clear uptrend as well. IWR broke out in early June and hit new highs this month. Broken resistance marks the first support zone to watch, the trend line support zone marks the second support zone, and these two will converge in the coming weeks. The indicator window shows the Russell MicCap iShares relative to the Russell 1000 iShares, which is mid-caps relative to large-caps. Mid-caps lagged as this ratio fell from late February to late May. The ratio turned up the last three weeks as mid-caps started outperforming again.
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Chart 6
SMALL-CAP BREAKOUT HOLDS... Chart 7 shows the Russell 2000 iShares (IWM) falling to the rising 200-day moving average in April, firming for several weeks and breaking out over the last few weeks. This breakout is bullish and signals a continuation of the bigger uptrend. As a continuation breakout, a move above the March highs is expected. The broken resistance levels and 200-day mark first support in the 111-113 area. The indicator window shows small-caps underperforming large-caps from mid March to mid May. Small-caps are trying to turn it around as the price relative broke above its May high this week.
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Chart 7
HOME CONSTRUCTION ISHARES TESTS THE BREAKOUT ZONE... The Home Construction iShares (ITB) continues to struggle after its breakout. Chart 8 shows ITB breaking the wedge trend line in late May and following through with a surge above 24.5 in early June. The wedge breakout is still holding, but ITB is having a hard time getting any upside traction as it fell below 24 last week and stalled this week. The trend line break, June lows and a small buffer combine to mark a support zone in the 23.5-24 area. This zone needs to hold to keep the breakout valid. A close below 23.5 would argue for a reassessment. The indicator window shows ITB relative to the S&P 500 SPDR (ITB:SPY ratio). This price relative fell to new lows today and ITB continues to show relative weakness. Chart 9 shows the Home Builders SPDR (XHB) with similar characteristics.
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Chart 8
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Chart 9
REFINERS AND THE $BRENT-$WTIC SPREAD... Investors and traders interested in refiner stocks should watch the spread between Brent Crude ($BRENT) and Spot Light Crude ($WTIC). Refiner margins typically expand when the $BRENT-$WTIC spread widens and shrink when this spread narrows. Chart 10 shows the price of Brent less the price of WTI in the main window. Brent has typically been higher than WTI since late 2010 and the spread was above $10 for almost all of 2011 and 2012 (yellow area). The spread tumbled in 2013 with a decline to zero in the summer and then rebounded in the second half of the year. Most recently, the spread declined back below $10 in 2014. With unrest in Iraq coming to the forefront, the spread widened rather significantly over the last two weeks (from $6 to $9). A move above $10 would show continued widening and this would be positive for refining stocks.
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Chart 10
Chartists can measure the correlation between this spread and refiner stocks using the Correlation Coefficient. The four indicator windows show the 26-week correlation for the $BRENT-$WTIC spread and four refiner stocks (Phillips 66 (PSX), Marathon Petroleum (MPC), Valero (VLO) and Western Refining (WNR)). Over the long-term, the Correlation Coefficient oscillates above/below the zero line. Even though it is not consistently positive or negative, I would say that the correlation is more positive than negative. This is especially true for the last two stocks: MPC and WNR. I am not looking for concrete trading signals with this indicator. Instead, I am looking to see if there is a positive or negative bias in correlation. Chart 11 shows a daily chart of the $BRENT:$WTIC spread for reference.
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Chart 11
REFINERS AND THE PRICE OF GASOLINE... Chartists interested in refiner stocks should also watch the price of Unleaded Gasoline ($GASO), which seems pretty obvious. Chart 12 shows $GASO surging above $3 in early 2011 and entering a trading range the last three years. Over the last few years, $GASO has bounced off support in the 2.5-2.6 area and hit resistance in the 3.3-3.4 area. $GASO just moved to 3.09 this week and is at its highest level of 2014. The swing off support is up and the next target is the resistance zone.
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Chart 12
The four indicator windows show the 26-week Correlation Coefficient for Unleaded Gasoline ($GASO) and the four refining stocks. These correlations are even more positive than the $BRENT-$WTIC spread correlations. Notice that I added a 52-week moving average to these correlations and every moving average has been positive for the last three years. This confirms that refiner stocks are positively correlated to the price of gasoline. The 52-week moving average smooths the fluctuations and allows chartists to quantify a bias. Chart 13 shows the Unleaded Gasoline ($GASO) breaking ascending triangle resistance and this targets a move to the 3.30 area.
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Chart 13
HOLLY FRONTIER, MARATHON, VALERO AND WESTERN REFINING... Unfortunately, there is not a refiner index or an ETF that specializes in refiners. The Oil & Gas E&P SPDR (XOP) has several refiners, but they account for a relatively small portion of the ETF as a whole. Instead, we must look at some individual stocks.
Chart 14 shows Holly Frontier (HFC) breaking above the January-March highs with a surge in April and then falling back in May-June. The stock found support near the April low and 62% retracement last week and surged above the wedge trend line this week. While the stock is short-term overbought after an 8+ percent surge, this breakout is valid as long as it holds. A move back below 47.5 would warrant a reassessment.
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Chart 14
Chart 15 shows Marathon Petroleum (MPC) with a big zigzag advance this year. Notice how the stock formed higher highs and higher lows over the last six months. Most recently, the stock reversed its downswing with a surge above 87.2 and is currently challenging the early June high.
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Chart 15
Chart 16 shows Valero (VLO) hitting a new high in early May and then correcting with a falling wedge. The stock reversed course well above the mid April low and broke wedge resistance with a three day surge. This breakout is bullish until proven otherwise. A move below 54 would call for a reassessment.
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Chart 16
Chart 17 shows Western Refining (WNR) breaking out to new highs in late April and early May. The stock then corrected with a falling wedge back to 39. After firming well above the mid April low, the stock broke the wedge trend line and first resistance with a big surge above 41. WNR is now challenging the early June high. This breakout looks valid as long as 39.50 holds.
