CONSUMER STAPLES AND UTILITIES SPDRS SURGE TO NEW HIGHS -- OIL ETFS BREAK PENNANT LINES -- XOP AND XES FOLLOW OIL LOWER -- INITIAL CLAIMS AND INDUSTRIAL PRODUCTION FAVOR LESS QE -- TIP SHOWS INFLATIONARY PRESSURES DECREASING
CONSUMER STAPLES AND UTILITIES SPDRS SURGE TO NEW HIGHS... Link for today's video. The defensive sectors took the lead on Monday with the Consumer Staples SPDR (XLP) and the Utilities SPDR (XLU) hitting fresh 52-week highs. Relative strength and upside leadership in these two sectors shows a preference for the defensive end of the market. In fact, the HealthCare SPDR (XLV) also hit a new high today. Even though the defensive sectors are leading, they are part of the broader market and strength here helps out the major index ETFs. Chart 1 shows XLU breaking wedge resistance in early October and exceeding its summer highs over the past week. The ETF is getting a bit extended on the upside because it is up some 12% since early August and up some 8% since early October. The indicator window shows the price relative (XLU:XLP ratio) breaking out in early October as XLU started to outperform. Chart 2 shows XLP surging over 5% and hitting a new high as well.
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Chart 1
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Chart 2
OIL ETFS BREAK PENNANT LINES... Oil futures came under selling pressure after Goldman Sachs cut its forecast for Light Crude in 2015. Goldman is now forecasting Light Crude to trade in the $75 area for most of next year, which is just $5 lower than current levels. The 2015 forecast for Brent Crude was cut to $85, which is near current levels. The analysts at Goldman based their forecast on supply and demand, but it would appear that oil prices already reflect most of their assumptions. Chart 3 shows the USO Oil Fund (USO) breaking pennant support with a decline below 30.50 today. Chartists can mark key resistance in the 31.5-32 area. A breakout here would reverse the short-term downtrend and argue for a retracement of the June-October decline. Chart 4 shows the US Brent Oil ETF (BNO) moving below the pennant trend line as well. Chartists can mark resistance at 35.
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Chart 3
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Chart 4
XOP AND XES FOLLOW OIL LOWER... Chart 5 shows the Oil & Gas E&P SPDR (XOP) gapping down in response to more weakness in oil. XOP became extremely oversold in mid October and bounced back above 60 a couple times. These bounces did not hold as the ETF gapped down today and moved below 57.5. I would now use this gap to mark first resistance and consider it negative as long as it holds. A quick move back above 59 would fill the gap and show resilience. Follow through above the mid October highs would break short-term resistance. Chart 6 shows the Oil & Gas Equip & Services SPDR (XES) breaking wedge support with a sharp decline. A move above 36 is needed to negate this break down.
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Chart 5
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Chart 6
INITIAL CLAIMS AND INDUSTRIAL PRODUCTION FAVOR LESS QE... The Fed is meeting this week and will make its policy statement on Wednesday afternoon. Economic growth, the employment situation and inflationary pressures feature in the decision making process at the Fed. Recent economic reports suggest that the economy is growing at around 3% per annum and initial jobless claims hit a multi-year low this month. Chart 7 shows Initial Claims ($$CLAIM) in a steady downtrend the last three years and this indicates that the employment situation is improving, not deteriorating. Instead of charting GDP, I will show a chart of Industrial Production because it is reported monthly and is a good representation of the manufacturing side of the economy. Chart 8 shows Industrial Production ($$IPI) in a clear uptrend the last five years. Notice that Industrial Production and the S&P 500 are above their rising 12-month moving averages.
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Chart 7
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Chart 8
TIP SHOWS INFLATIONARY PRESSURES DECREASING... While Initial Claims and Industrial production favor less quantitative easing and a more normal Fed policy, inflationary pressures are falling and this may delay actual tightening. I would not characterize the current environment as deflationary, but there is evidence of disinflation, which is just a decrease in the inflation rate. Chart 9 shows the 12-month Rate-of-Change for the Core Consumer Price Index ($$CCPI). Note that the scale is on the left. The Rate-of-Change remains positive overall and seems to move above/below the 2% level. The Rate-of-Change peaked in early 2012 and fell the last two years. This indicates that the inflation rate is declining and confirms a disinflationary environment.
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Chart 9
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Chart 10
In addition to the Consumer Price Index, chartists can analyze the Inflation-protected Treasury Bond ETF ($TIP) for clues on inflationary pressures. Chart 10 shows TIP relative to the 20+ YR T-Bond ETF (TLT), which is not inflation-protected. TIP outperformed from mid 2012 until the end of 2013 and this suggested that inflationary pressures were increasing. TIP has underperformed this year and this indicates that inflationary pressures are decreasing. This is hardly surprising because commodity prices have fallen sharply this year and the Dollar has risen sharply. The indicator window shows TIP hitting resistance near the 62% retracement and forming a lower high this month.
