FIVE WEAK SECTORS ARE PULLING MARKET LOWER -- ENERGY AND MATERIALS ARE BEING HURT BY FALLING COMMODITIES -- UTILITIES, TELECOM, AND REITS ARE BEING HURT BY FALLING BOND PRICES -- CATERPILLAR AND 3M LEAD INDUSTRIALS LOWER
FIVE SECTORS PULLING S&P 500 LOWER... There are ten major sectors in the S&P 500. Although five of them have held up relatively well, five others are in downtrends and dragging the market lower. Two of the worst sectors are tied to falling commodity prices. Chart 1 shows the Energy SPDR (XLE) threatening to break its January low. Its relative strength ratio (below chart) has already done so. Its -9% loss since May makes it the market's weakest sector. Chart 2 shows the Materials SPDR (XLB) in a similarly weak position. The XLB is being pulled down by falling metal prices (precious and industrial). Note also that both sector ETFs are well below their 200-day moving averages. Although some analysts view lower commodity prices (especially energy) as a good thing for the economy (and they may be right), the fact is that energy and material stocks (including gold) are also part of the stock market. There are 43 energy stocks in the S&P 500 (a weighting of 12%). There are also 30 material stocks (3.5%). It's not helpful for the market to have so many stocks in major downtrends. Unfortunately, there are more.
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
UTILITIES, TELECOM, AND REITS ARE ALSO IN DOWNTRENDS... The next two sectors in downtrends are tied to the rise in Treasury yields (and the prospect for a rate hike sometime soon). Both are interest rate sensitive and fall along with bond prices. Chart 3 shows the Utilities SPDR (XLU) falling hard today and dangerously close to a new low. The XLU is also well below its 200-day average. Chart 4 shows Telecom iShares (IYZ) also trading below its 200-day line and in a downtrend. Notice their falling relative strength lines (below charts). Chart 5 shows the Dow Jones REIT ETF (RWR) in a similar downtrend. I'm not counting REITs (Real Estate Investment Trusts) as a separate sector because they're a subset of the financial sector. But it's worth noting their descent. All three groups are big dividend payers when usually lose ground when bond yields are rising. Add those three to the number of stock groups that are weighing on the overall market.
(click to view a live version of this chart)
Chart 3
(click to view a live version of this chart)
Chart 4
(click to view a live version of this chart)
Chart 5
INDUSTRIALS SPDR ALSO TUMBLES... I've saved this one for last because it may be the most important. Chart 6 shows the Industrials Sector SPDR (XLI) nearing its July low after its recent bounce met resistance at its 200-day moving average. Its relative strength ratio (below chart) also shows weak relative performance all year. I believe this may carry a more ominous message because it's comprised of economically-sensitive stocks that are tied to the ups and downs of the economy. That includes transportation stocks which have been very weak this year. Rails have been the weakest group losing -19% over the last three months (and again today). Heavy construction has been another big industrial loser. It's hard to imagine the stock market shaking off this kind of weakness in such an important sector. A few big names in the sector are being hit especially hard this week.
(click to view a live version of this chart)
Chart 6
CATERPILLAR, 3M, AND UTX TAKE BIG HITS... Caterpillar (CAT) is one of the weakest stocks in the XLI today. Chart 7 shows the stock plunging to its March low. CAT blamed its problems on weakness in construction and mining (and energy) in places like Brazil and China. That's another spillover from the plunge in commodity prices. Chart 8 shows 3M (MMM) tumbling to a new 2015 low. Chart 9 shows United Technologies (UTX) having a terrible week as well. All three stocks are falling in heavy trading which is a bad sign. All three are also among the top ten holdings in the XLI. Two transportation stocks falling hard today are Ryder (-4%) and Union Pacific (-5). All five of those XLI stocks are trading below their 200-day moving averages.
(click to view a live version of this chart)
Chart 7
(click to view a live version of this chart)
Chart 8
(click to view a live version of this chart)
Chart 9
DOW THREATENS ITS 200-DAY LINE ... Speaking of 200-day averages, Chart 10 shows the Dow Industrials threatening to slip below their 200-day line. The two biggest percentage losers in the Dow are Caterpillar and 3M. The Dow survived a challenge of that long-term support line earlier in the month. It's getting a chance to test it again. Needless to say, a decisive close below its red line (especially at week's end) would be a turn for the worse. Seasonal factors are also starting to work against the market. After a weak second quarter (selling in May), the market often experiences a summer bounce during the first half of July. It then enters the more dangerous months of August and September. That might set the stage for an autumn bottom, but most likely from lower levels.
