AUTOS DRIVE CYCLICALS HIGHER -- GENERAL MOTORS HAS THE STRONGER PATTERN -- BUT FORD TURNS UP -- INDUSTRIAL LEADERS INCLUDE FLOWSERVE, DOVER, AND WW GRAINGER -- MONEY CONTINUES TO ROTATE OUT OF TECHNOLOGY INTO CHEAPER VALUE STOCKS
CONSUMER DISCRETIONARY SPDR SHOWS RELATIVE STRENGTH ... One of the signs of growing strength behind the post-election stock market rally is that it's being led higher by economically-sensitive stocks like cyclicals and industrials. [We'll deal with industrials shortly]. Chart 1 shows the Consumer Discretionary SPDR (XLY) finding support along its August high near 82. Equally important is the November upturn in the XLY/SPX relative strength ratio (top of chart). That shows new leadership by cyclical stocks which is a positive sign for the economy and stock market. Retailers have been cyclicals leaders over the last month. Autos are today's XLY leaders.
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Chart 1
AUTO INDEX SURGES TO BULLISH BREAKOUT ... Autos are the strongest part of the consumer cyclical sector today and Chart 2 shows why. It shows the Dow Jones US Automobile Index ($DJUSAU) surging more than 4% and rising above a falling trendline drawn over its April/July highs. Its relative strength ratio (top of chart) is starting to turn up as well. Auto stocks have been underperformers for the last three years. That may be taking a turn for the better. Today's XLY leaders are Ford and GM.
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Chart 2
FORD AND GENERAL MOTORS HAVE STRONG CHART DAY... Chart 3 shows Ford (F) surging more than 6% today to the highest level in five months. It's also cleared its 200-day moving average. Its relative strength ratio (top of chart) is jumping as well. Ford has been in a downtrend for more than two years. It's current chart pattern has the look of a bottom being formed. General Motors (GM) is doing even better. Chart 4 shows GM breaking through a resistance line extending back to its early 2014 peak. That's a strong breakout. The GM/SPX ratio (top of chart) is turning up as well. Autos represent another undervalued part of the market that's starting to attract a lot more attention and money. That's consistent with expectations for a stronger economy.
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Chart 3
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Chart 4
INDUSTRIAL SPDR ALSO LEADS MARKET HIGHER... Economically-sensitive industrial stocks are also leading the market higher. Chart 5 shows the Industrial Sector SPDR (XLI) hitting a new record high today. More revealing is the dramatic upturn in its relative strength ratio during November (top of chart). Industrials are right behind financials and energy as today's market leaders. Over the last month, XLI leadership has come form industrial suppliers, commercial vehicles, heavy construction, and transportation stocks like airlines, rails, and truckers. [Despite its name, the XLI includes transportation stocks which have been among the market's strongest stocks since the start of November]. Today's message will focus on three leaders from the industrial machinary and industrial suppliers group which are having having a very impressive chart day.
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Chart 5
FLOWSERVE, DOVER, AND GRAINGER ACHIEVE BULLISH BREAKOUTS... The day's two biggest percentage gainers in the XLI are in the Industrial Machinery group. And they're both having a great chart day. Chart 6 shows Flowserve (FLS) surging above a falling trendline extending back to June. Its relative strength ratio (top of chart) has turned up as well. Chart 7 shows Dover Corp. (DOV) breaking above a "neckline" drawn over its May/August highs. That's an impressive bullish breakout. Its relative strength ratio (top of chart) is bottoming as well. In the Industrial Suppliers group, WW Grainger (GWW) is among the XLI's strongest stocks. Chart 8 shows GWW breaking through resistance to reach the highest level since mid 2015. A lot of money is flowing into industrial and transportation stocks that stand to benefit from a stronger economy.
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Chart 6
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Chart 7
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Chart 8
ROTATION CONTINUES INTO VALUE STOCKS ... Two days after the election (November 10), I wrote a message entitled: "Rotation Out of Growth Stocks into Value Stocks Causes Profit-taking in Technology". We're seeing a replay of that rotation again this week as technology stocks are underperforming the market while financials, energy, and industrials surge. The Chart 9 compares the move to new highs in the S&P 500 Value ETF (black bars) to the weaker action in the S&P 500 Growth ETF (red bars) since the start of November. That rotation can be seen more graphically by the surge in the IVE/IVW ratio over the last month (top of chart). The reason behind the rotation is understandable. Technology accounts for 35% of the growth ETF (IVW). Meanwhile, the three largest value groups are financials (25%), energy (12%), and industrials (11%). A lot of money has moved into those last three groups which were perceived as relatively undervalued. Money used to make those purchases has been coming out of more expensive technology stocks. And that rotation into cheaper parts of the market may have a lot further to run.
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Chart 9
FINANCIALS AND ENERGY STILL LOOK VERY CHEAP ... A lot of questions are being asked about whether or not recent rotations into cheaper parts of the market can continue. The next chart suggests that they can. The red line on top is a relative strength ratio of the Technology SPDR (XLK) divided by the S&P 500. It's clear that technology has been a market leader for the last ten years. The Financials (XLF)/SPX ratio (green line), however, shows that sector to have been a terrible performer since 2007. It's only just starting to rise. The gray area shows the energy sector (XLE/SPX ratio) to have been a very weak performer as well. Chart 10 suggests that both of those previously ignored groups have a long way to go to restore them to their normal market relationship. [Transportation stocks, which are helping drive the industrial sector higher, could be added to the list of undervalued stocks starting to play catch up, as well as industrial metal stocks like copper and steel that have been pulling material stocks higher]. The economy appears to be evolving from a deflationary, low interest world into a more inflationary period with rising rates and stronger economic growth. Monetary stimulus is giving way to fiscal stimulus which should lead to more infrastructure spending. That suggests that post-election rotations may have a lot further to go. All the more reason to be in those market sectors that will benefit the most from that new economic climate. Technology may not be one of them.
