ENERGY STOCKS FOLLOW CRUDE OIL LOWER -- RISING DOLLAR IS PUSHING COMMODITY PRICES LOWER -- DEFENSIVE SECTORS ARE STILL IN THE LEAD -- CYCLICALS RUN INTO RESISTANCE WHILE TECHOLOLOGY SECTOR WEAKENS
CRUDE OIL ENTERS BEAR MARKET... Commodities as a group have been under a lot of selling pressure for several months. But the weakest part of that group over the past month has been energy. Chart 1 shows the price of WTIC Light Crude Oil (through yesterday) falling to the lowest level in eight months. [WTIC is trading lower again today and is threatening to drop below $60 for the first time since February]. In so doing, it has broken support levels formed during June and August, as well as its 200-day moving average. It has also lost more than 20% since its early October peak which qualifies as bear market territory. As usually happens when oil drops, energy shares are also taking a big hit both in absolute and relative terms. Chart 2 shows the Energy Sector SPDR (XLE) dropping for the second day in a row to mark the end of its short-term rebound attempt. The XLE is in a clear downtrend and is testing major support along the lows formed during the first half of the year. Its relative strength ratio (top of Chart 2) has now fallen to the lowest level since March. A rising dollar is one of the factors pushing energy and most other commodity markets lower.
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Chart 1
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Chart 2
RISING DOLLAR IS HURTING COMMODITIES ... A rising dollar has had a negative impact on commodity prices. The green line in Chart 3 shows the Invesco U.S. Dollar Index (UUP) in an uptrend that started during April. This month's rebound has put the greenback near a new 18-month high. The brown bars show the Bloomberg Commodity Index peaking at the end of May and losing more than -8% since then. All commodity groups have fallen during that same period, with the biggest losses in base metals (-14%). Selling in industrial metals (and materials stocks in general) has had a lot to do with weakness in Chinese stocks and the yuan since that country is the world's biggest importer of those commodities. The brown bars show the Bloomberg Commodity Index nearing a test of its September lows. There may be both good and bad news in falling commodity prices. The good news is that lower commodity prices should lessen inflation pressures building up in the pipeline. The bad news is that weaker commodities may be reflecting a weaker global economy (especially in foreign markets). Another potential side effect of a rising dollar is that it can hurt the performance of U.S. multinational stocks that depend on exports. A stronger dollar also puts more downward pressure on foreign stocks, and emerging markets in particular. Falling Chinese stocks are leading emerging markets sharply lower today.
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Chart 3
DEFENSIVE SECTORS ARE STILL IN THE LEAD ... Despite the recent stock rebound (especially on the day after the midterm election), defensive stock sectors are still the strongest part of the stock market. The four relative strength lines in Chart 4 are compared to the S&P 500 which is the flat black line. Since October 1, the four top sectors have been consumer staples (blue line), utilities (red line), REITs (green line), and healthcare (pink line). After a strong October, the four lines dipped near the end of October as the market rebounded into November. All four lines, lines, however, are starting to rise again. Those four defensive sectors are also the only sectors currently trading above both their 50- and 200-day moving averages. Their ability to hold up this month suggests that investors aren't abandoning their defensive hedges.
Chart 4
CYCLICAL AND TECH REBOUND BEING TESTED... Of the other seven market sectors outside of the four shown above, five of them are still below their 200-day moving averages. The only two that managed to regain that line are cyclicals and technology. But their rallies may be stalling. Chart 5 shows the Consumer Discretionary SPDR (XLY) having risen to the highest level in month, but backing off from a test of its 50-day moving average (blue line). Chart 6 shows the Technology Sector SPDR (XLK) climbing back above its 200-day average (red line) on Wedneday. Today's selling, however, is putting that upside breakout in jeopardy. In both cases, trading volume (green bars in lower box) has been noticeably lighter during the recent rebound. That's not an encouraging sign.
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Chart 5
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Chart 6
NASDAQ COMPOSITE FALLS BACK BELOW 200-DAY LINE... The Nasdaq Composite was the last of the major stock indexes to regain its 200-day average at mid-week. But it may be the first to fall back below it. Chart 7 shows the Nasdaq Composite Index trading back below its (red) 200-day line in today's trading. Most of that selling is coming from a weak technology sector (see Chart 6). The Nasdaq in turn is leading the rest of the market lower today. Chart 8 shows the S&P 500 trading above its 200-day average, but meeting resistance along its October 17 intra-day peak at 2816 and its 50-day average (blue line). It may also be heading toward a retest of its 200-day line. That will be an important test of the staying power of the November rebound.
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Chart 7
