Market Sectors: The Good The Bad And The Ugly
- Home builders, KBW banks, consumer cyclicals and resources look vulnerable
- REIT's, utilities, and healthcare look promising
This week I am going to back off from the usual market commentary in order to focus on some industry groups and sectors that have the potential to lead the market higher or lower, depending on the direction of its ultimate breakout. Let’s begin with those that look technically vulnerable but require some breakdown point to be surpassed before an outright bearish signal is given.
Home Builders
The Spider Homebuilder ETF, the XHB, reached its high last spring but now finds itself resting on the neckline of a potential head and shoulders top. I’d say that a daily close below $33 would be sufficient to qualify as a decisive downside break. It’s likely to happen because the RS line, in the center window, has already completed such a top. Not only has that top formed, but the KST for relative action, in the bottom panel, has gone bearish and as long as that state of affairs continues it will add downside pressure.
Chart 1
KBW Bank Index
The KBW Bank Index ETF, the KBE, touched a bull market high back in the spring. However, the relative strength line in the center panel of Chart 2 peaked nearly a year earlier. This indicated that the KBE was being dragged up by a rising market rather than by its own momentum. Now the RS line has broken its 2015 up trendline which, in combination with the bearish KST, suggests that the trend of underperformance will continue. That view is also supported by the fact that the RS line experienced a false breakout in the October/November period, which was later confirmed by the penetration of the red up trendline. The RS line is currently at the 0.165 level, which the dashed blue line shows to be an important pivotal point. The actual price is also at a similar (blue dashed line) juncture point, so both absolute and relative action can both be said to be at a critical level.
Chart 2
Consumer Cyclicals
Consumer cyclicals (XLY) may be in the process of forming a 3-month head and shoulders top. That would materialize with a decisive break below the neckline, say at $76. Were that to happen, the price would also be trading below its 200-day MA. One leading sign of weakness comes from the RS line, which has violated an intermediate up trendline. The KST for relative action, in the bottom window, is also bearish and not particularly overstretched, which means that plenty of downside potential in relative action is still possible.
Chart 3
Chart 4 features a cumulative line constructed from a daily plurality of consumer cyclical stocks registering net new highs. Note that it has just crossed below its MA and its KST has just crossed below zero. The cumulative line has held up pretty well up to now, but it may well be in the process of turning.
Chart 4
Goldman Sachs Natural Resources
The relative strength line often leads the absolute price, so it makes sense to follow their relationship. For example, during the bear market in the Goldman Sachs Natural Resource ETF, the IGE, the RS line has consistently hit a new low ahead of the price itself. Two previous instances have been flagged with the horizontal red trendlines and the connecting dashed ones. In early December, the RS line broke down from its trading range and this week the price confirmed. Even though the IGE has already experienced a long-term price drop, this persistent relative weakness suggests that lower prices lie ahead. What we need to see is a positive set up whereby the price registers a new low but the RS does not. A small example of this type of action preceded the early 2014 rally and was flagged by the two small green arrows.
Chart 5
REITS
The chart for the Dow Jones Real Estate ETF, the IYR, is more compelling than those described above. In this instance, we have the potential for the completion of a base for both the price and its RS line. Since the KST for relative action is also rising that offers some encouragement for an upside breakout. Note also the positive divergence that developed between the price and its RS line back in the summer.
Chart 6
Chart 7 shows that the fortunes of the IYR and that of the 30-year Treasury bond price ($USB) have been closely related in the last year or so. If the bond rallies above $158.50 and the IYR is able to surpass $77 there would be an excellent chance of a strong rally for both.
Chart 7
Healthcare
The Spider Healthcare (XLV) has recently been trading in a very narrow range. In the meantime, the RS line has completed a base and rallied back to its intermediate down trendline. Clearly the price needs to rally above the trading range at say, $72.75 in order to go bullish. Also, it will be important for the RS line to break out as well. That seems likely because the KST for relative action in the bottom window, is already in an established bullish trend.
Chart 8
Utilities
The Spider Utility (XLU) has just seen the 10-day EMA for the McClellan Volume Oscillator (!VMCOSIXLU) cross above its (red) 20-day counterpart. The arrows show that a worthwhile short-term rally has usually followed such an event. If we see a similar response by the price that would take it well above its 50 and 200-day MA’s, the resulting move would probably be above the green trend line too.
Chart 9
One more encouraging aspect comes from the fact that the McClellan Volume Summation (!VMCSUMXLU), in Chart 10, has just crossed above its 10-day MA, another event that has traditionally resulted in a worthwhile advance.
Note that if the REIT and Utility ETF’s break to the upside this would be a vote for lower interest rates. A bearish KBE would also hint at the same thing for a real, a real contrarian play.
Chart 10
Good luck and good charting,
Martin J. Pring
The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group or its affiliates.
