Some Sectors Starting to Rotate from their Post-March Pattern
From time to time, I like to review the various sectors to see which ones are in a positive or negative relative trend and which might be in a position to change. To do this, I use what I call my Nirvana Template or, in StockCharts-speak, Nirvana Chart Style. It consists of four panels, as featured in Chart 1. The top two feature the absolute price and its KST, while the lower ones replicate the same format, but for the relative action. Since we are reviewing the US market, the comparative standard is the S&P Composite. Were it an individual country ETF, either the MSCI World Stock ETF (ACWI) or the Dow Jones World Index ($DJW) would be appropriate.
There are two forms of this style sheet. The first is the regular one incorporating weekly data, which is designed to monitor the primary trend. The second is what I call theBaby Nirvana; it features the same arrangement, but is designed to follow the short-term trend and uses daily data. Remember, you can click on any of the charts shown here and save them as a style sheet of your own.
Chart 1 displays the SPDR Technology ETF (XLK), where we can see that all four series are in an uptrend. This sector has been powering the S&P higher, which is a good thing.
That said, Chart 2 shows that on a short-term basis, things have started to revert to the downside, as both KSTs are in a bearish trend and the price itself has violated its post-March up trendline. The relative line has reached a critical point in the form of the two converging trendlines. Moreover, the price is right at a small head-and-shoulders neckline. Its completion would suggest further downside action and the possibility of the primary uptrend being threatened. Until evidence to the contrary appears, we should give that uptrend the benefit of the doubt. However, the speculative nature of the recent advance means that technology should be watched closely.
Technology may have started to lose some luster, but the relative action of some other sectors has started to improve. Take the SPDR Basic materials (XLB). Chart 3 shows that this ETF has recently broken out to an all-time-high and experienced a long-term absolute KST buy signal. Relative action has just completed a 2-year base, which has enabled the relative KST to trigger a decisive buy signal. The short-term picture is obviously overstretched, but this long-term turnaround suggests that materials will ultimately do well.
The long-term chart for the SPDR Industrials is positive, as both the absolute and relative series are above their respective 65-week EMAs. The long-term KSTs are not above their EMAs, but they have begun to flatten.
Chart 5, which shows the short-term picture, argues in favor of a relative long-term momentum buy signal. That's because the relative line has just completed a base and the relative short-term KST is in a positive, but by no means overextended, mode.
Another sector that has recently touched a new high is the SPDR Consumer Cyclicals (XLY). In addition, both KSTs have recently triggered buy signals, which suggests that cyclicals have some way to go before they top out.
Near-term though, Chart 7 is stressing the need for some corrective action before prices move higher, as both KSTs are in a negative mode and the price itself has violated its post-March up trendline.
The iShares Dow Jones Transportation ETF, the IYT, looks to be in good shape as it has recently broken above a major resistance trendline along with the RS line. Neither KST has yet to go bullish by crossing above its 26-week EMA, but both have started to turn up.
The bearish short-term KST in Chart 9 is a bit of a problem, but the breakout by the RS line suggests that, whatever happens, transports are likely to outperform in the period ahead.
Financials have been one of the worst-performing areas, as you can see from the fact that the RS line in Chart 10 is very close to its March low. One encouraging sign comes from the fact that the absolute KST has started to flatten, but that's as far as it goes.
On the other hand, Chart 11 points out that both the price and its RS line are just below resistance in the form of trendlines and, in the case of the price, its 65-week EMA. The absolute KST is virtually flat, indicating a fine balance between buyers and sellers. However, the buy signal from the RS KST tells us that, whether the price rises or falls, it is likely to outperform the S&P Composite in the next few weeks.
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 Groupof Walnut Creek or its affiliates.
