INDUSTRIAL SECTOR CONTINUES TO SHOW NEW LEADERSHIP -- DOW JONES HEAVY CONSTRUCTION INDEX MAY BE NEARING UPSIDE BREAKOUT -- QUANTA SERVICES AND JACOBS ENGINEERING HAVE ALREADY BROKEN OUT -- AMONG RETAILERS, BEST BUY HITS A NEW RECORD

INDUSTRIAL SECTOR CONTINUES NEW LEADERSHIP ROLE... Industrial stocks assumed a new market leadership role during November and remained in that role again this week. Chart 1 shows the Industrial Sector SPDR (XLI) gaining 1.4% during the week which made it second only to the financial sector's gain of 1.5%. Both did better than the S&P 500 which rose 0.35% during the week. The XLI/SPX relative strength ratio (top of chart) jumped sharply during November and reached the highest level since October this week. That upturn corresponded to the buying of cheaper parts of the market that stood to benefit from a stronger economy and the tax reform package. A big part of that gain came from rising transportation stocks which are included in the XLI. The two biggest contributors to this week's XLI gain were airlines and aerospace. Today's message, however, is going to concentrate on the third strongest XLI group for the week, which is heavy construction.

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Chart 1

DOW JONES HEAVY CONSTRUCTION INDEX STARTING TO IMPROVE... Investors looking for a group of stocks that are "cheap" couldn't find a better candidate than heavy construction stocks. The monthly bars in Chart 2 show the Dow Jones Heavy Construction Index having gone virtually nowhere since 2008. Its falling relative strength ratio (solid line) shows just how bad the group has done relative to the S&P 500. But things may be starting to look better for the group. To the bottom right of Chart 2, we see the heavy constuction index moving in position to challenge its late 2016 peak and a falling resistance line drawn over its 2008/2014 highs. Needless to say, a move above both of those chart barriers would be a positive sign for the group. Let's take a closer look.

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Chart 2

UPSIDE BREAKOUT MAY BE IMMINENT ... The weekly bars in Chart 3 show the same Dow Jones Heavy Construction Index nearing a test of its late 2016 high. A close above that barrier would put the index at the highest level in more than three years and would constitute a bullish breakout. Its relative strength ratio (solid line) has been rising since August. It's blue 10-week average has crossed over its red 40-week average which is a positive sign. And its weekly MACD lines (below chart) have turned positive (as have the monthly MACD lines). A couple of individual stocks in the index are already achieving upside breakouts.

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Chart 3

QUANTA SERVICES AND JACOBS ENGINEERING ACHIEVE BULLISH BREAKOUTS... The two top performers in the heavy construction group are shown below. And their charts look very strong. The weekly bars in Chart 4 show Quanta Services (PWR) rising above its early 2017 peak to put the stock at the highest level in 17 years. Its relative strength ratio (top of chart) appears to be turning up as well. It's not the only stock in the group achieving a major bullish breakout. The monthly bars in Chart 5 show Jacobs Engineering (JEC) rising above major resistance near 66 formed at the start of 2014. That bullish breakout puts the stock at the highest level in nine years. Its relative strength ratio (solid line) is rising as well. Fluor (FLR), which is not shown here, has risen to the highest level in seven months. But it remains a laggard in the group.

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Chart 4

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Chart 5

BEST BUY HITS NEW RECORD -- LULULEMON AND MICHAEL KORS TURN UP... A number of stocks in the clothing and specialty retail group had an especially strong week. In the second group, Chart 6 shows Best Buy (BBY) breaking out to a new record. Its relative strength ratio (top of chart) has risen to the highest level in four months. In the clothing group, the weekly bars in Chart 7 show Lululemon (LULU) surging to the highest level since summer 2016. Its 10- and 40- week moving averages are also in bullish alignment. The weekly bars in Chart 8 show Michael Kors Holdings (KOR) rising above its early 2016 peak to close above 60 for the first time in two and a half years. It looks like investors are doing some bargain shopping in the retail space.

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Chart 6

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Chart 7

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Chart 8

WEEKLY SUMMARY... The Dow and S&P 500 saw modest gains this week. The Nasdaq had a small loss. Financials and industrials were the week's biggest gainers. Cyclicals also had a good week. Losers were healthcare, energy, and utilities. The technology sector stabilized this week after recent selling, but ended basically flat. Gains in internet stocks were offset by losses in semiconductors. A strong jobs report on Friday gave another boost to the dollar, which continues to weigh on the price of gold. Bond yields also climbed. A Brexit breakthrough on Friday also helped lift European shares and contributed to a positive close for the week. Despite the recent sector rotations, the market uptrend is very much intact and should remain so during the seasonally friendly month of December. Since a Fed rate hike is widely expected next week, it's doubtful that it will upset markets. Have a nice weekend.