NASDAQ TURNS POSITIVE FOR YEAR -- S&P 500 MAY RETEST APRIL HIGH -- USING SCTR LINES TO RANK SECTORS
STOCKS RALLY ON BAD ECONOMIC NEWS... Last weekend's message suggested that the spring rally in stocks may have peaked. Judging from this week's strong price action, that doesn't appear to be the case. Stock prices have shown remarkable resilience in the face of very weak economic news. As an example, stocks rallied sharply on Friday following the worst unemployment numbers since the Great Depression. It certainly seems like stock investors are looking past those dismal economic numbers to a relatively quick economic recovery during the second half of the year. In the meantime, all we can do is follow the chart action. And that action was positive this week.
NASDAQ TURNS POSITIVE FOR THE YEAR... And as usual, the technology-driven Nasdaq market led the way. The daily bars in Chart 1 show the Nasdaq Composite Index rising above its early March intra-day peak at 9070 to put it at the highest level since February. The Nasdaq is now in positive territory for the year.
S&P 500 HEADED FOR A TEST OF APRIL PEAK... Chart 2 shows the S&P 500 gaining 3.5% for the week and nearing a test of its April high and its 200-day moving average. That will be an important test for it and the rest of the market. Also encouraging is that all eleven market sectors gained ground on the week. With a few standout performers.
A SCTR STUDY OF SECTOR LEADERS... My last two messages suggested using SCTRS to find sector leaders. This message elaborates on that. Chart 3 ranks the eleven market sectors by their SCTR ranking in the last column. SCTR stands for the StockCharts Technical Rank which can be used to determine which sectors are leading and which ones are lagging behind. Using that criteria, the four strongest sectors are Technology (96), Communication Services ( 89), Healthcare (89), and Consumer Discretionary (84). Those are the clear leaders. The most obvious way to utilize those rankings is to focus primarily on stronger sectors which show market leadership; and avoid market laggards with low SCTR rankings. The direction of their SCTR lines is also helpful.
CHARTING SCTR LINES... Plotting SCTR lines on the price chart itself also offers some insight into a sector's relative performance. Chart 4 plots the SCTR line on top of the Technology SPDR for the last four months. And it shows the SCTR line at 96 and remaining over 90 for most of the year. The fact is that technology has been a market leader for a much longer period of time. And remains so. Chart 5 shows the SCTR line for the Healthcare SPDR also above 90 during the recent stock rally reflecting its role as the market's second strongest sector this year. The upper line is starting to slip a bit, however, ending the week at 89. That reflects some loss of upside momentum.
XLC AND XLY SHOW RISING SCTRS... The upper box in Chart 6 shows the SCTR line for Communication Services (XLC) at 89 and rising. That's a positive sign for the XLC which cleared its 200-day average this week. Chart 7 shows the SCTR line for the Consumer Discretionary SPDR (XLY) at 84 and also rising. That's a sign that money has been rotating into that emerging leader as well. The chart also shows the XLY nearing a test of its 20o-day line.
CONSUMER STAPLES WEAKEN...Consumer staples are the fifth strongest sector in the Chart 3 ranking, but with a much weaker SCTR rank of 63. Chart 8 also shows the SCTR line dropping over the last month. That reflects some loss of upside leadership in that defensive group. As a rule, any SCTR rank above 60 is worth keeping an eye on for potential market leadership. But it's generally a good idea to wait until the SCTR line starts rising again.
WEAKER SECTOR SCTRS... None of the other sector SPDRs qualify as market leaders which requires a move above 60. Five of them remain below 40 which reflects relative weakness. They include financials (10), energy (12), industrials (17), utilities (35), and real estate (36). Materials at 54 are in the neutral zone between 60 and 40. That means that only the four sector leaders shown above are currently pulling the market higher. [Go to ChartSchool for an explanation of how the Stockcharts Technical Rank System (SCTR) is constructed and interpreted].
