DEFENSIVE STOCKS LIKE STAPLES AND UTILITIES START TO LOSE LEADERSHIP ROLE -- INDUSTRIAL SPDR BULLISH BREAKOUT SHOWS NEW LEADERSHIP -- THAT'S USUALLY BEEN A GOOD SIGN FOR THE MARKET -- MATERIALS AND TECHNOLOGY SPDRS TEST FOURTH QUARTER HIGHS
STAPLES START TO LOSE LEADERSHIP... Consumer staples were market leaders during December and January as the market started to weaken. That's normal. The daily bars in Chart 1 plot the Consumer Staples SPDR (XLP) along with the XLP/SPX relative strength ratio since last October. The XLP/SPX ratio rallied throughout December and January. I remember warning during December that leadership by defensive groups like staples and utilities was a warning sign for the market which started the year on a very weak note. Interestingly, the daily bars in Chart 1 show the XLP still hitting new highs. That may seem strange considering that the stock market has been rallying for the last month. What makes more sense is that leadership by the defensive group is slipping. Chart 1 shows the XLP/SPX ratio peaking in mid-February and declining since then. That shows that investors are rotating their money elsewhere. Utilities are also losing sponsorship.
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Chart 1
UTILITIES ALSO LOSE LEADERSHIP... Chart 2 shows the same loss of leadership taking place in the Utilities Sector SPDR (XLU). The XLU and its relative strength ratio turned up during December and rose together into February. That was the result of a weak stock market and a flight into safer Treasury bonds and bond proxies like utilities. The two lines are no longer rising together. Although the XLU continues to reach new highs, the declining XLU/SPX ratio shows loss of upside leadership. That shows more confidence on the part of investors. Let's see where that money is going.
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Chart 2
INDUSTRIALS SPDR SHOWS NEW LEADERSHIP... Chart 3 shows where a lot of that defensive money is going. The daily bars show the Industrials Sector SPDR (XLI) breaking out over its fourth quarter high to the highest level in nine months. It's the first sector ETF to accomplish that this month. Its relative strength ratio (top of chart) has broken out in decisive fashion as well. That shows a bullish combination of absolute and relative strength. And it's a good sign for the market as a whole since the XLI is made up economically-sensitive industrial and transportation stocks. When they're doing well, the stock market usually does as well.
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Chart 3
MATERIALS AND TECHNOLOGY ETFS TEST OVERHEAD RESISTANCE... Two other economically-sensitive stock sectors are testing overhead resistance. Chart 4 shows the Materials SPDR (XLB) right up against its fourth quarter high. It has, however, cleared its 200-day average. The XLB/SPX ratio (top of chart) is in a similar situation. The first quarter rebound in the XLB has been driven by a strong rebound in commodity prices. Chart 5 shows the Technology SPDR (XLK) nearing its fourth quarter high as well. A close above that barrier would put the XLK at a new record. The XLK/SPX ratio (top of chart) is already in record ground.
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Chart 4
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Chart 5
S&P 500 SPDRS NEARS DECEMBER HIGH ... Chart 6 shows the S&P 500 SPDRs (SPY) trading above its 200-day line and nearing a test of its December intra-day high at 206. Its 14-day RSI line, however, shows the SPY having reached short-term overbought territory at 70. Its daily MACD lines (below chart) are still positive, but have reached potential resistance at their November high. All of which suggests that the stock rally that started in mid-February may start encountering some selling as it nears overhead resistance. Having said that, I continue to believe that the market's technical underpinnings remain positive. Last week, I showed the NYSE Advance-Decline line reaching the highest level since last May. Other breadth indicators are in uptrends.
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Chart 6
NYSE BULLISH PERCENT INDEX IN UPTREND... Back in February, I showed the NYSE Bullish Percent Index giving a point & figure buy signal at 34. [The BPNYA measures the percent of NYSE stocks in p&f uptrends]. I'm showing the line version of that same index today. And it carries a positive message. The BPNYA has cleared its fourth quarter high and a falling trendine drawn over its 2014/2015 highs. It's unusual for the market to give up much ground while that line is rising.
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Chart 7
NYSE PERCENT OF STOCKS ABOVE 200-DAY MA EXCEEDS FIFTY... Last Thursday I showed the Percent of NYSE Stocks Above Their 200-day Average rising above its fourth quarter high to achieve a bullish breakout. I remarked that a close above 50% would be even better (because it would put most NYSE stocks back in uptrends). Chart 8 shows the red line having exceeded 50%. It's also challenging a major resistance line drawn over its 2014/2015 highs. What it does from there will help determine if the current stock rally has more staying power. I'm aware that some analysts still view the current rally as part of a major topping process. The breadth indicators I'm looking at, however, argue for a more positive outlook. So does the fact that investors are rotating out of defensive stocks into more economically-sensitive ones.
