APPAREL RETAILERS LEAD CYCLICALS HIGHER -- RETAIL LEADERS ARE KOHLS, NORDSTOM, AND URBAN OUTFITTERS -- RAILS LEAD INDUSTRIAL SPDR HIGHER -- UNION PACIFIC AND NORTHERN SOUTHERN IN UPTRENDS -- TRANSPORTATION/INDUSTRIAL RATIO TURNS UP
S&P RETAIL SPDR SURGES ... My last message on Thursday mentioned a rotation into discretionary sectors like retailers and out of defensive consumer staples. That rotation is looking even more impressive today as retail stocks are strong. Chart 1 shows the S&P Retail SPDR (XRT) surging nearly more than 2% today to lead cyclical stocks higher. And most of that is coming from apparel retailers which also happen to be the biggest component of the XRT (25%). Chart 2 shows the Dow Jones Apparel Retailers Index nearing a test of its August high. Several larger retailers in the XRT are leading the cyclical sector higher today.
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Chart 1
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Chart 2
KOHLS, NORDSTROM, AND URBAN OUTFITTERS TURN UP... The best way to find stock winners is to look for individual leaders in a strong industry group in one of the strongest sectors. The next three stocks all qualify. Chart 3 shows Kohls (KSS) surging to the highest level since mid 2015. Chart 4 shows Nordstrom (JWN) clearing its March high to reach the highest level in a year. Finally, Chart 5 shows Urban Outfitters (URBN) trading at an eighteen month high.
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Chart 3
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Chart 4
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Chart 5
RAILS HELP LEAD INDUSTRIAL SPDR HIGHER... Chart 6 shows the Industrial Sector SPDR (XLY) surging to record highs since last Tuesday's election. The XLI was led higher over the last week by stocks tied to construction and defense. Despite it's name, however, the XLI also includes transportation stocks. In fact, transportation stocks account for nearly a quarter of the XLI (22%). And they've been helping lead it higher. Over the last month, airlines and truckers were its biggest gainers. In today's trading, three of its biggest contributors are rail stocks. Chart 7 shows Union Pacific (UNP) trading at a new eighteen-month high. [UNP is one the biggest XLI holdings]. Chart 8 shows Norfolk Southern (NSC) nearing a test of its early 2015 highs. The reason I point this out is because transportation stocks are in a strong uptrend at the moment. The XLI allows traders to take advantage of rising industrial and transportation stocks with one ETF. That's Dow Theory in action.
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Chart 6
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Chart 7
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Chart 8
TRANSPORTATION/INDUSTRIAL RATIO TURNS UP ... Here's another reason why traders might want to use an ETF that includes transportation stocks by themselves (IYT) or along with industrials (XLI). They're rising faster than industrials. Since the start of the month, transports have gained twice as much as industrials (by an 8% to 4% margin). Last Thursday's message showed a ratio of the Dow Transports divided by the Industrials on the verge of an upside breakout. Chart 9 shows the ratio climbing over its March high today to the highest level in a year. [The transports are up another 2% today while industrials are flat]. The recent transportation breakout is also a bullish Dow Theory signal. I neglected, however, to credit one of our subscribers (Robert Upson, CMT) who sent me a chart of the ratio a week before the election and alerted me to its significance. Nice call.
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Chart 9
DOW INDUSTRIALS LOOK OVERBOUGHT... Part of today's hesitation in the Dow Industrials is likely due to a short-term overbought condition The 14-day RSI line on top of Chart 10 is over 70 for the first time since April. The Dow has climbed 1000 points over the last six trading days and is due for a breather. It's recent rise to a new record, however, along with positive sector rotations described over the last week (including the transportation breakout) leave it in a strong technical condition.
