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Leading Sectors Mid-Cap Stocks As at the top of the Nasdaq market in 2000, mid-cap stocks are outperforming both small and large cap stocks. This may be because fund managers need liquidity and want stocks that can “move.” Mid caps provide both of these possibilities. The S&P mid cap index, as represented by the exchange traded fund (ETF) symbol: MDY, may have broken into a new 52-week high. As this article is being drafted on Tuesday evening, the break cannot yet be considered decisive. Note the bullish relative price line. A decisive break of resistance at 125 will likely take the mid cap ETF to about 135. Forming a base at 125 would also be bullish, yet if MDY is rejected at 125, it’s likely going to about 120 in the short term. If 120 doesn't hold, there is support at 115.
Retail Consumer-related stocks, as represented by the Retail Holders Index (RTH) are nearing the high made between the presidential election and Christmas of 2004. The relative price chart broke out of a downtrend in late April, and it now appears as if the retail index will likely make a high near 99 or 100. The action is bullish in the short term, but the overall pattern as indicated by the 2-year daily chart shows erratic price action and an emotional market.
Although showing similar erratic and emotional behavior, the Fidelity Select Consumer Fund has already moved into a new 52-week high.
Aerospace and Defense Unlike the retail index, the Fidelity Aerospace and Defense Fund (FSDAX) illustrates a healthy uptrend. The fund lists Boeing, Honeywell, Precision Cast Parts, Northrop Grumman, Goodrich Corp., L-3 Communication, Raytheon Co., Harris Corp., Lockheed Martin, and General Dynamics Corp. as its top holdings. Someone is going to have to pay for the debt that is being incurred and used to provide the sales revenue of these companies. That someone is, for the most part, the US consumer.
Foreign Banks Similar to the US about a year ago, the weak Euro and suggested interest rate cuts in Europe appears to be helping the stocks of European banks. It is telling that of the 197 sector categories tracked by Investors Business Daily (IBD) (with one exception), there are no categories of US financials and banks that are in the top 50% in 6-month stock performance. In fact, most US financials and banks rank in the bottom 33 percent. What is the one exception? US Consumer Finance ranks Number 54 out of 197 categories. While US financials are lagging, the sector “Foreign Banks” ranks in the top 16% of IBD sector categories in 6-month stock performance. The Dow Jones Sector Titans 30 Banks (Euro) broke into a 200-week high as of Tuesday.
Real Estate (Not Real Estate Finance) The Real Estate Sector shows no sign of cooling as indicated by its bullish chart of the Reality Major I-shares (ICF).
Yet while the stock market is rewarding real estate companies with a bullish uptrend, it is notable that the home finance companies are not in gear for the first time in three years as indicated by the chart of the Fidelity Home Finance Fund. Although exhibiting a similar shape as the real estate sector, the technical pattern of the home finance sector appears to be quite “heavy” of late. Something is likely to give – in the intermediate term either home finance will rally, or home builders will fall.
Energy The bull market in energy and energy stocks seemingly provides bulls with both a linear uptrend and numerous entry points for those late to the party.
Lagging Sectors Biotech Baring any technical trend changes, there seems to be little incentive to buy biotechnology stocks in the near term. In a momentum market, you need some momentum!
Basic Materials, Industrials, and Transports There seems to be weakness developing in the charts of earnings-driven companies. There is a completed head-and-shoulders (HAS) reversal pattern in the relative price chart of the Basic Materials I-Shares. The reversal pattern has been formed, but has yet to be completed.
Similar behavior is shown in the Industrial I-Shares, yet not as bearish as basic materials. The behavior around the trendlines warrant attention since this may signal an important clue as to the health of the economy excluding the US consumer.
As pointed out last week, the Dow Transportation index was tracing out a bearish HAS reversal pattern, yet the reversal is not completed until the neckline is broken.
The Dow Jones trucking index is behaving similarly to the transportation index. The 50-day moving average has passed below the 200-day moving average and it will be important to watch whether the index continues to trend below these moving averages.
Technology Semi-Conductors Technology I-shares are trading in a converging triangle pattern. Note that when technology shares change direction in their relative price compared to the S&P500, this has been a reliable indicator as to the absolute trend of technology shares. It appears that this may have occurred recently as indicated in the chart below. Yet this could whipsaw as well, given the condition of the overall market which tends toward bullish.
Semi-Conductors The semiconductors holders’ index is in a trading range of about 15%, between 30 and 35. As I draft this article, the semiconductors are about a point from resistance and 4.18 points from support.
Today’s Market The major indices were up marginally today on healthier volume, as the market made a “U turn” at mid day. Another 52-week high for the Dow Jones US Home Construction index was achieved on an analyst upgrade. There will be several homebuilders reporting their quarterly results over the next few days and the trend has been for homebuilders and retailers to gap up on the day of their positive earnings announcements. Bucking the trend toward weak gains today were biotechnology companies. Retailers were also up strongly. So once again, the US consumer is bravely leading the way. If there is a significant change of trend that has been occurring in the markets, it is the action of the US bond market, which seems to have turned in the short term. The 10 and 30 year bonds seemed to have changed direction decisively even though today’s action showed little change. Note the action in the 10-year note yield. If this is the start of a new trend as it appears, it could be significant and not good to the US consumer and US stocks.
A similar change in trend can be seen in the Euro to Gold ratio, where a support level has perhaps been broken but not yet decisively.
From a short term perspective, the stock market has to be given the benefit of the doubt as up days have come on higher volume than down days. The S&P 500 is at short term minor resistance and it appears that it wants to punch through and head for its early March highs, the same way that the S&P mid caps already have. A drop in the price of oil or another good retailer report should give it all the incentive it needs to head higher.
Have a great evening. Martin Goldberg
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