TRANSPORTS DIVERGE FROM INDUSTRIALS -- UTILITY SURGE MAY ALSO SIGNAL DEFENSIVE SHIFT -- UTILITY/TRANSPORTATION RATIO TURNS UP -- CONSUMER STAPLES SPDR NEARS NEW RECORD -- THAT MAY ALSO SIGNAL A MORE DEFENSIVE TONE IN AN OVERBOUGHT MARKET
TRANSPORTS START TO WEAKEN ... A number of short-term caution signals are showing up for stocks which might be hinting that the current rally is due for a pullback. Some of those caution signals are coming from relationships between the three Dow Averages. Let's start with the transports. Chart 1 shows the Dow Jones Transportation Average unable to hold its recent move to new high ground. That raises the possibility of a short-term rally failure. In addition, its 14-day RSI line (top of chart) is showing negative divergence from the price action (blue arrow). MACD lines overlaid over the price bars have lagged far behind the rising price and are in danger of turning negative (yellow area). The reason for concern is that transports are supposed to rise with industrial stocks in a healthy uptrend. Not only are they not doing that, the divergence between the two has gotten worse. Chart 2 shows the Dow Transportation/Industrials ratio dropping to the lowest level since the November election. That could spell short-term trouble for both averages, or at least a pause in the market's steep uptrend.
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Chart 1
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Chart 2
DOW UTILITIES TURN UP ... The other caution signal may be coming from this week's upturn in utility shares. Chart 3 shows the Dow Jones Utility Average climbing to the highest level since last September. That puts it higher than it was during the November election. Utilities are closely tied to the direction of bond prices and viewed as a defensive sector. This week's upturn may be signalling a rebound in an oversold bond market, and a more cautious tone in stocks. Utilities have underperformed the Dow Industrials since the election by a four to one margin. This week's utility gain, however, may be its best week versus the Industrials since the election. Utilities are starting to outpace the transports as well. Chart 4 hows the Dow Utility/Dow Transportation ratio climbing to the highest level since early November. That may be another caution sign. The Dow Industrials continue to hit record highs. Its 14-day RSI line, however, is very overbought at 81%. A pullback from that elevated level wouldn't be too surprising.
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Chart 3
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Chart 4
CONSUMER STAPLES NEAR RECORD... Utilities aren't the only defensive sector turning up. Chart 5 shows the Consumer Staples SPDR (XLP) surging to the highest level since last July and very close to a new record. It's also the best relative performance in the XLP since the election. The blue bars in Chart 5 plot the XLP/S&P 500 relative strength ratio. The last blue bar is at the highest level since early November. That may also be hinting at a shift into more defensive stocks. Staples are also starting to outperform consumer discretionary stocks by the widest margin since the election. None of these sector shifts are enough to stop the major uptrend in stocks. They may, however, be hinting at a slight shift away from economically-senitive groups into more defensive ones. And they may be hinting that the post-election rally is ready for a breather.
