DOW TRANSPORTS FALL BELOW 200-DAY AVERAGE -- AMERICAN AIRLINES, FEDEX, AND JB HUNT ARE LEADING IT LOWER -- WHILE UTILITIES REACH NEW RECORD -- TECHS, INDUSTRIALS, AND CYCLICALS WEAKEN DURING MAY -- WHILE DEFENSIVE GROUPS TAKE LEADERSHIP ROLE
DOW TRANSPORTS FALL BACK BELOW 200-DAY LINE... Transportation stocks are one of the weakest parts of the market today. Chart 1 shows the Dow Jones Transportation Average now trading below its 50- and 200-day moving averages. Not surprisingly, tranports are also showing relative weakness. The blue line in Chart 1 is a relative strength ratio of the transports divided by the Dow Industrials. That ratio has now fallen to the lowest level in nearly two months. To followers of Dow Theory, it's not a good sign when transports underperform industrials. Some of today's biggest losses are coming from airlines, delivery services, and truckers. Chart 2 shows American Airlines (AAL) threatening its March low. Chart 3 shows FedEx (FDX) trading near its lowest level of the year. Chart 4 shows J.B. Hunt (JBHT) in a weak technical condition as well. What's also disturbing is that the transports are falling while utilities are one of the market's strongest groups; and hitting a new record.
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Chart 1
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Chart 2
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Chart 3
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Chart 4
UTILITIES REACH A NEW RECORD... Along with some other defensive sectors, utilities have become new market leaders. Chart 5 shows the Dow Jones Utility Average trading in record territory this week. And it's also showing relative strength. That can be seen by the rising green line which is a ratio of the Dow Utilities divided by the Dow Industrials. The ratio turned up a month ago and been rising ever since. Over the past month, utilities are the market's third strongest sector; right behind healthcare and REITs. Consumer staples are in fourth place. That certainly suggests that stock investors have turned more defensive during the month of May. Some other sector rotations suggest the same thing.
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Chart 5
TECHNOLOGY, INDUSTRIALS, AND CYCLICALS WEAKEN ... Many of this year's strongest sectors have become market laggards during May. The biggest change can be seen in technology which went from a first place ranking since the start of the year, to a ninth place ranking during May. The blue line in Chart 6 shows technology falling this month versus the S&P 500 (solid black line). Industrials have also slipped in the sector rankings from fourth place year-to-date to eighth place during May. The red line shows Industrials also undperforming the SPX during May. Consumer discretionary stocks have also slipped this month. That can be seen by the falling green line. A lot of that weakness is resulting from increased trade tensions between China and the U.S. At the same time, several defensive sectors have gone from laggards to leaders this month.
Chart 6
DEFENSIVE SECTORS ASSUME LEADERSHIP ROLES ... The next four relative strength ratios shows where most of the defensive money has been going this month. The pink line shows REITS having a relatively strong month. REITs have been strong performers all year; but got even stronger over the last month. The green ratio shows consumer staples having a strong month. And the red line shows utilities doing better against the S&P 500 as well. Interestingly, the strongest sector over the last month has been healthcare. The rising blue line shows healthcare doing better than the S&P 500 this month. It's also interesting that healthcare went from the year's weakest sector to the strongest over the last month. The healthcare sector also has defensive qualities. While defensive stocks have been leading, the past month's weakest sectors have been energy, materials, technology, industrials, and consumer discretionary stocks. All have heavy exposure to global trade tensions.
Chart 7
CONSUMER STAPLES/DISCRETIONARY RATIO TURNS UP ... The daily bars in Chart 8 plots a relative strength ratio of the Consumer Staples SPDR (XLP) divided by the Consumer Discretionary SPDR (XLY) since last October. That ratio also carries a defensive message. It rose sharply during the fourth quarter as stocks sold off sharply, and investors favored defensive staples over economically-sensitive cyclicals. The ratio dropped during the first four months of the new year as the stock market recovered. The ratio turned back up during May as the stock rally has been stalled by rising trade tensions, and has now reached the highest level in four months. That's another sign that investors are taking out some defensive protection.
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Chart 8
RISING TARIFFS WEAKEN RETAILERS... Retail stocks have a weak chart pattern and are weighing on consumer cyclical stocks. Chart 9 shows the S&P Retail SPDR (XRT) trading near the lowest level of the year. It's also well below moving average lines. The XRT is being led lower by home improvement stocks, apparel retailers, and stocks tied to autos. Fears of higher trade tariffs, and how retailers are going to cope with higher import costs, are one of the factors taking a toll on the group.
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Chart 9
S&P 500 CAUGHT BETWEEN MOVING AVERAGE LINES ... The daily bars in Chart 10 show the S&P 500 trading above its red 200-day average, but having trouble rising back over its blue 50-day line. Whichever of those two lines is decisively broken first will help determine market direction. Its 14-day RSI line (top box) is testing resistance at 50; while daily MACD lines (middle box) are still in negative territory. Sectors in the red today include energy, cyclicals, industrials, financials, technology, and materials. Defensive sectors are holding up better. The VIX Index is trading near 15 and still below the 20 level. It usually takes a move above 20 to start getting traders more nervous. A stronger dollar continues to weigh on energy and materials stocks. While lower bond yields are hurting financials. Computer hardware and semiconductor stocks are the weakest parts of technology.
