VALUE ISHARES CONTINUE TO OUTPACE GROWTH ISHARES WHICH ARE BEING PULLED DOWN BY TECHNOLOGY SELLING -- BUT FINANCIALS, HEALTHCARE, ENERGY, AND INDUSTRIALS SECTORS ARE RISING -- BOEING CLEARS 200-DAY LINE AND LEADS DOW HIGHER
ROTATION FROM GROWTH TO VALUE CONTINUES... Last Thursday I wrote about a rotation from "growth stocks" which rely on growing earnings into "value stocks" that are viewed as relatively cheap. That rotation is continuing. Chart 1 shows the S&P Value iShares (IVE) trading at a nine-month high after clearing its fourth quarter high. The IVE/SPX ratio (top of chart) turned up in February and is still rising. I explained that the main drivers in the IVE were financials, energy, and healthcare. You can add industrials to that list as well. Those four groups comprise 60% of the IVE. And all four have been doing better this year. Chart 2 shows the S&P 500 Growth iShares (IVW) starting to pull back from overhead resistance at its fourth quarter high. More importantly, the IVW/SPX ratio (top of chart) has fallen to a six-month low. As I explained last week, technology accounts for a third of the IVW (32%). [It's five biggest stocks -- Apple, Microsoft, Facebook, Amazon, and Google -- are all down for the week]. That's where the main problem is. The question is what effect will that rotation have on the direction of the stock market.
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Chart 1
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Chart 2
TECHNOLOGY SECTOR SPDR IN DOWNSIDE CORRECTION... Chart 2 shows the Technology Sector SPDR (XLK) falling to the lowest level in more than a month and slipping below its 50-day average (blue line). However, it remains well above its 200-day line, and chart support along its early February peak. In addition, the 50-day average is trading well above the 200-day line. All of which suggest that the pullback in technology hasn't done much chart damage. The problem lies with the XLK/SPX ratio (top of chart) which has fallen to the lowest level in six months. The stock market usually struggles when technology is under pressure. That's especially true considering that technology has the biggest weight in the S&P 500 (19%). Now for some good news.
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Chart 3
S&P 500 SECTORS THAT ARE RISING ... Here's the good news. The four biggest S&P 500 sectors after technology are all in much better shape. Financials are the second biggest S&P 500 weight at 15%. Chart 4 shows the Financials SPDR (XLF) clearing its 200-day average with a rising RS line. Chart 5 shows the Health Care SPDR (12% of the S&P) in a similar situation. Chart 6 shows the Energy SPDR (11%) in a much stronger position. Chart 7 shows the Industrials SPDR (10%) in an even stronger position. Those four sectors combined account for nearly half of the S&P 500 (45%), and should be more than enough to offset weakness in the technology sector. [Those four rising sectors are also the biggest weightings in the S&P 500 Value iShares (IVE) in Chart 1]. The bottom line is that the pullback in technology may be enough to stall or slow down the uptrend in the S&P 500. But not enough to offset buying in other sectors. In other words, the technology setback by itself doesn't appear serious enough to damage the market's overall uptrend. The rotation out of growth and into value stocks is a reasonable way to deal with an aging stock market which marked its seventh birthday last month. That rotation should also serve to extend the bull market's life.
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Chart 4
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Chart 5
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Chart 6
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Chart 7
BOEING HELPS DOW, APPLE HURTS ... A look at the leaders and laggards in the Dow today helps explain what's going on beneath the surface. Four of the Dow's leaders are economically-sensitive stocks that include Boeing, United Technology, Caterpillar and Chevron. Chart 8 shows Boeing (BA) trading above its 200-day average by the most since December. The two worst Dow performers are in technology (Apple and Microsoft). Chart 9 shows Apple (AAPL) gapping sharply lower today. Even with that technology drop, however, 22 Dow stocks are in the black today. That suggests that the market is still in pretty good shape.
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Chart 8
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Chart 9
DOW STILL IN UPTREND... The daily bars in Chart 10 show the Dow Industrials having just exceeded its fourth quarter high. In addition, its 50-day average has crossed back over its 200-day line (blue circle) for the first time since December and by a wider margin. The Dow has come a long way since its February bottom, and may be due for some consolidation or a short-term pullback. The Dow's recent upside breakout, however, suggests that its seven-year bull run still has further to go.
