STOCKS GAINED GROUND DURING SECOND QUARTER -- SECTOR LEADERS WERE ENERGY, TECHNOLOGY, REITS, AND UTILITIES -- INDUSTRIALS AND FINANCIALS WERE THE WEAKEST -- FINANCIALS REMAIN IN DOWNTREND -- BANKS ETFS REMAIN UNDER PRESSURE
DOW AND S&P 500 GIVE UP SOME OF FRIDAY'S GAINS... First a quick update on Friday's price action. The Dow and S&P 500 gave up some of their gains on Friday afternoon. The Dow gained 55 points (+0.23%) but ended slightly below its 200-day average (Chart 1). The S&P 500 rose 2 points (+0.08%) to close just above its 50-day average (Chart 2). Friday was the last trading day of the second quarter which often results in book-squaring and window dressing by money managers. We may start to get a better read on the market as the third quarter starts next week. Seasonal factors may also be holding the market back. The period from June to September is traditionally the weakest period of the year. That's especially true during mid-term election years. The good news is that usually leads to a strong fourth quarter. A look at the second quarter results should give us a better read on the market's current condition. It may also offer clues as to what else has been holding the market back.
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Chart 1
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Chart 2
SECOND QUARTER LEADERS AND LAGGARDS... Stocks gained ground during the second quarter. The Russell 2000 Small Cap Index led with a +7.4% gain, with the Nasdaq in second place at +6.3%. The S&P 500 rose +2.9% while the Dow lagged with a +0.70% gain. Eight sectors rose during the quarter. Chart 3 shows the four that outpaced the S&P 500 being energy, technology, REITs, and utilities. Energy stocks gained on rising energy prices, while utilities and REITs benefited from a drop in bond yields during May and June. Technology retained its role as a market leader. That's important since technology is the biggest sector in the S&P 500 (23%). Chart 4 shows the two weakest sectors during the quarter being industrials and financials. [They were also the two weakest sectors during the month of June]. Why that matters is that their combined weight of 26% in the S&P 500 more than offsets the 23% weight in the stronger technology sector. Consumer staples also lost ground but have a smaller weight of 7%. Financials have the second biggest weight in the S&P 500 at 16%. So what they do really matters. Let's take a look.
Chart 3
Chart 4
FINANCIALS STILL IN DOWNTREND... Financials have been the the year's third weakest sector with a loss of -4%. Only staples and industrials did worse with losses of -9% and -4.5% respectively. Chart 5 shows the Financial Select SPDR (XLF) forming a negative pattern of falling peaks and falling troughs since its January peak. The only good news is that the upper trendline drawn over its peaks is falling faster than the lower trendline drawn under its troughs. Chart readers will recognize those two converging trendlnes as a potential "falling wedge" pattern which often carries bullish implications. The fact that its 9-day RSI line (top box) is oversold is encouraging. So is the fact that its 50-day average remains above the 200-day line. But the XLF is trading below that 200-day line. And its MACD lines (lower box) remain negative. What the XLF needs to reverse its downtrend is for prices to rise high enough to break the upper trendline. Bank stocks are the biggest part of the XLF (44%). They're in a precarious position as well.
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Chart 5
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Chart 6
BANK ETFS WEAKEN... The daily bars in Chart 6 (above) show the S&P Bank SPDR (KBE) trading sideways since January. Its relative strength line, however, shows it underforming the market since the end of May. Reasons given for that weaker performance have been lower bond yields over the past month, as well as a flattening yield curve. Yesterday's close below its 200-day average, however, was especially discouraging. That came just a day after most big banks passed their annual stress test, and announced bigger dividend payments and stock buybacks. It's not a good sign when stocks fall on good news. It's especially important for the KBE to stay above its 2018 lows to keep it from falling into a downtrend. Even smaller regional banks, which have been doing much better of late, slipped this week. Chart 7 (below) shows the S&P Regional Banking SPDR (KRE) falling below its 50-day average to the lowest level in nearly two months. Weak bank stocks are not an enouraging sign for the financial sector which, in turn, isn't a good sign for the stock market. It could be argued that a weak financial sector is one of biggest factors weighing on the major market averages. Along with a weak industrial sector which is also testing its 2018 lows (see Chart 8). The stock market is going to need more help from both sectors during the second half of the year. Together they make up more than a quarter of the S&P 500.
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Chart 7
