DOW AND S&P 100 HOLD UP THE BEST -- INDUSTRIAL SECTOR SHOWS RELATIVE STRENGTH -- BANDWIDTH INDICATOR HITS NEW LOW FOR XLI -- 3M AND GENERAL ELECTRIC -- AEROSPACE & DEFENSE ETF PACES INDUSTRIALS -- ALLIANT TECH AND ROCKWELL COLLINS
DOW AND S&P 100 HOLD UP THE BEST... Link for today's video. After a big advance in August, stocks succumbed to some selling pressure in September. This selling pressure, however, has not been uniformly spread throughout the stock market. As noted in Monday's Market Message, small-caps bore the brunt of selling pressure with the Russell 2000 falling over 2% this month. Large-caps, in contrast, are holding up much better because the Dow Industrials and S&P Large-Cap 100 are down around .5%, which hardly qualifies as a correction. Compared to the August advance, the September decline is just a shallow pullback so far. Chart 1 shows the Dow Industrials surging 5% in August and then forming a small flag this month. A break above the red resistance zone would be bullish. Chart 2 shows the S&P Large-Cap 100 with a similar pattern.
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Chart 1
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Chart 2
INDUSTRIAL SECTOR SHOWS RELATIVE STRENGTH ... Differences can also be seen in sector performance. Chart 3 shows a sector SPDR performance for this month. Notice that the Technology SPDR (XLK) and the Consumer Staples SPDR (XLP) are the only two sectors showing gains. The Industrials SPDR (XLI) shows the smallest loss and shows relative strength because it is down much less than SPY. Utilities, materials and energy show both relative and absolute weakness this month.
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Chart 3
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Chart 4
Chart 4 shows the equal-weight sector ETFs to provide a more balanced approach. All nine are down this month. The Equal-weight Consumer Staples ETF (RHS), Equal-weight Healthcare ETF (RYH) and Equal-weight Industrials ETF (RGI) are down the least, which means they show "relative" strength. The utilities, materials and energy are the weakest equal-weight sectors this month. Taken together, I am intrigued with relative strength in the industrials sector overall.
BANDWIDTH INDICATOR HITS NEW LOW FOR XLI... Now let's look at the charts for the Equal-weight Industrials ETF and Industrials SPDR. Chart 5 shows XLI within a rather tight consolidation the last few weeks. How tight is this consolidation? The BandWidth indicator, which measures the difference between the upper and lower Bollinger Band, is at its lowest level in over a year. This tells us that volatility has seriously contracted over the last few weeks and traders should prepare for a volatility expansion.
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Chart 5
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Chart 6
Chart 6 shows XLI with blue trendlines to define the consolidation. A break above the September high would signal a continuation of the August advance and argue for new highs. The indicator window shows the StockCharts Technical Rank (SCTR) bottoming in early August and moving above 60 twice over the last six weeks. Notice that I set a band in the 40-60 range. A move above 60 indicates that the ETF is in the top 40% of the ETF universe for performance. A move below 40 means the ETF is in the bottom 40% for performance. With the SCTR near 70% and rising, XLI is showing relative strength the last few weeks. Chart 7 shows RGI consolidating near resistance from the summer highs.
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Chart 7
3M AND GENERAL ELECTRIC... General Electric (GE) accounts for around 10% of XLI and I am watching this stock for a potential breakout. Chart 8 shows the stock bouncing in August and then forming a falling wedge over the last few weeks. This wedge looks corrective and a breakout would be bullish. Chart 9 shows 3M (MMM) with a consolidation near resistance. A breakout would forge a fresh 52-week high and be bullish. Note that GE and 3M are also part of the Dow Industrials.
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Chart 8
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Chart 9
AEROSPACE & DEFENSE ETF PACES INDUSTRIALS ... The Aerospace & Defense ETF (PPA) is part of the industrials sector and this ETF is holding up well in September. Chart 10 shows PPA reversing in early August and breaking above the June trend line. The ETF stalled over the last few weeks, but has yet to break down or give up its gains. The indicator window shows the SCTR moving above 60 as PPA starts showing relative strength. Note that Lockheed Martin, Raytheon, Northrop Grumman and General Dynamics hit new highs over the last few weeks. The next two stock charts come from the defense group.
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Chart 10
ALLIANT TECH AND ROCKWELL COLLINS... Chart 11 shows Alliant Techsystems (ATK) gapping up last week and breaking the triangle trend line with good volume. The stock stalled the last few days and formed a small pennant. A follow through breakout at 135 would be bullish.
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Chart 11
Chart 12 shows Rockwell Collins (ROK) breaking down in mid July and then retracing around 62% with the August surge. The stock then traded in a very narrow range the last four weeks. We do not need Bollinger Bands to tell us that volatility has contracted significantly this month. Chartists can watch 77.5 up and 76 down.
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Chart 12
SCANNING FOR RELATIVE STRENGTH ... With stocks succumbing to a bit of selling pressure in September, it may be a good time to look for sectors, industry groups and stocks that are holding up better than the market. Those that hold up the best during a correction often outperform when the corrections end. We know that small-caps are down over 2% this month and large-caps are down fractionally. Chartists can run a scan looking for stocks with a positive Rate-of-Change over the last 11 trading days (ROC(11)>0). After all, a stock shows relative strength if it is up month-to-date and the major stock indices are down. The image below shows a sample scan that could use some more refining because it will return over 800 stocks. For example, chartists could further refine by adding a MACD bullish cross. I would then keep these on a watch list for consideration when the market as a whole turns up again (assuming it will turn up again!).
