Defensive Sectors Lead in May

These are not the sectors that should lead in a bull market. When S&Ps are making new highs, you want to see Discretionaries, Technology, Financials and the commodity based areas also outperforming the major averages. In May we saw the complete opposite – and the Stock Market struggled. Healthcare, Consumer Staples, and Utilities all showed their leadership qualities over the past month.

This is a chart of each of the S&P Sector ETFs relative to the S&P500. Notice the clear outperformance in the defensive names:

We talk about sector rotation here all the time. But we’re seeing the importance of this before our very eyes. If US Equity averages are going to put in a key bottom, rotation needs to follow.

I’ll be waiting for relative outperformance in these key sectors as confirmation that we should be putting money to work into risk assets.



Ryan Detrick: Good Time to Buy Stocks

Ryan Detrick over at Schaeffer’s has definitely become one of my favorite technicians over the last few years. He’s consistent with his methodology and does some excellent work, specifically with sentiment. He sat down for a chat with Jeff Macke on Yahoo Breakout this week and thinks this might be a good time to start putting some money to work.

Check it out:

(Make it a full screen; charts will look much clearer)

Nice job Ryan



Negative Sentiment Gives Green Light To Buy Stocks Now: Detrick (Yahoo! Breakout)

Tags: $IWM $SPY $QQQ

Was That a False Breakdown in the China ETF?

We’ve seen these before and I love finding them. The ‘False Move’ is by far and away my favorite trade setup. The reason is really simple: a defined amount of limited risk with an infinite profit potential (theoretically). So let’s get right into it:

We’re looking at the popular iShares FTSE China 25 Index Fund ($FXI). We know that this 33 and change level is very important support that held back in the 4th quarter of last year. This new found support created the higher low that helped take $FXI to 6-month highs earlier this year. More importantly this price also represents the 61.8% Fibonacci retracement from those key October lows that we always talk about in most of the major averages.

Interesting how the price briefly breached those key levels before quickly reversing. This is the sort of action that gets me going in the morning.  This is why I do what I do. This is why I study price. To find stuff like this.

So let’s take a closer look. This next chart shows just the last few months. What stands out to me are the lower lows made in price last week while momentum had already turned up. In other words, while price was still trending lower, momentum was putting in a higher low (See RSI Explained):

If this was indeed a false breakdown, I would expect a fast and powerful move higher in $FXI. This would certainly be a positive for US Equities and other risk assets. The risk is defined and the profit potential has no ceiling. But the positive implications on a more macro level cannot be denied. New lows in $FXI and we’ll know there’s a big problem out there and we’ll get much more defensive. But for now, these are extremely bullish developments.


Also See:

Was That a False Breakdown in Precious Metals? (Allstarcharts Jan 3, 2012)

Interactive Map: Percentage of Home Loans Underwater

How cool is this interactive map I found on It breaks down the percentage of home loans underwater city by city. The darker the red, the worse off the area.

I included a few cities that I found interesting while playing around with the app: Manhattan seems to be doing well, especially compared to neighboring New Jersey. Meanwhile, my home town Miami continues to be a complete disaster. San Francisco and Silicon Valley are doing well and appear to be benefiting from all of the new wealth in the area. And I threw in a map of Fargo, North Dakota where very few home loans are underwater and business is booming.

Interesting stuff right?




The US Housing Crisis: Where Are Home Loans Underwater (Zillow)

The Stock Market Can Trade Sideways Too, You Know

SFO Magazine: Stocks Stuck in a Range Need Time

Friday, May 25, 2012
By J.C. Parets

Stocks are stuck in a range that I think will be difficult to get out of anytime soon. The best cure for the S&P500’s current dilemma is probably going to be time.


A couple of weeks ago, the large-cap index broke below key support levels from the March lows. This was a critical breakdown in my opinion, because it damaged some of the charts on a more intermediate-term basis. The problem this caused was newfound resistance on any future attempts to get back above the 1340-1370 area. We also have a declining 50-day moving average that just rolled over hanging around the same levels. This brings in supply, making it more difficult to get back above there very quickly.


Now on the low end, the S&P500 currently is battling it out with some important support. The 1270-1290 level is going to be key, because it served as big time resistance in the fall. When the S&Ps broke out to start the new year, stocks left that resistance in rear-view mirror. The polarity there combined with an upward sloping 200-day moving average makes this an important floor for stocks.


This 5-7% range is likely to stay as a home for stocks in the near future. I don’t see anything out there convincing me stocks should have a dramatic breakout or breakdown soon. Markets don’t always have to be trending higher or lower. Sometimes, especially after a monster move like what we’ve just seen, the major averages need to digest a bit.


I think this sideways, frustrating environment is here to stay for the time being. And I don’t think there’s anything wrong with that. There are other asset classes out there making big moves – both up and down. I’d look elsewhere if you’re a short-term trend follower – nothing here to see in that respect.



Stocks Stuck in a Range Need Time (SFO Magazine)

Tags: $SPY $ES_F $SPX

What Risk-Off Looks Like From An Intermarket Perspective

One of my favorite things about John Murphy’s crew is how well they collect data from a variety of asset classes to help tell a story. Arthur Hill’s depiction of the Intermarket world this morning is perfect example of the level of talent at

Today we’re looking at a 6-Month Performance Chart of 30-Year Bonds, US Dollar, Stocks, Gold and Crude Oil. We’ve seen a clear flight to safety with Bonds and the Dollar sitting at 6-month highs. Meanwhile, Gold and Crude Oil are doing the exact opposite down near 6-month lows. Notice that stocks are stuck somewhere in the middle trying to find their way:

I’ll be watching how Crude Oil and Gold react to these low levels, while the Dollar and Treasury Bonds hang out in the nosebleed section. A reversal of fortunes here should certainly take stocks higher, along with Gold and Crude Oil. But if buying pressure continues into the dollar and bonds, then I would expect the Stock Market to struggle.

I think it’s important to learn from the success and misfortunes of other asset classes. Wouldn’t we be selling ourselves short if we chose to ignore this stuff?



Dollar and Treasuries Lead as Gold and Oil Lag (StockCharts)


Triple Tops Don’t Exist: Dow Transports Edition

We say it all the time, “The more times that a level is tested, the higher the likelihood that it breaks”. This goes for both resistance above head and support down below.

Today we’re looking at the non-existent triple top in the Dow Jones Transportation Average. We’re charting the iShares ETF $IYT to keep things simple. Look at the 3 tops during the first half of the year:


With each test of resistance, more and more sellers will have already sold. The presumption here is that eventually, anyone willing to sell at this level will have already done so. Therefore leaving only buyers up here in the mid-90s. Or the 5300s for the actual Dow Jones Transportation Average.

On the support side, former resistance in the 4th quarter, shown with red arrows, is clearly coming into play. Our polarity principles tell us that former resistance should become support. And this is exactly what we’re seeing as the 200-day moving average adds some more demand to the area.

New lower lows below last week’s support, and it would appear as though more time will be necessary before the next attempt to penetrate through that overhead supply. But I think that with 3 tests already, a 4th and maybe a 5th will come soon. Typically one of these two will is successful. And eventually that resistance in the mid-90s will become support at a future time.

This is the sort of stair-step action that we typically see in a bull market.


Tags: $IYT $TRAN

Industrial Sector At Important Juncture

The Industrial space has been under-performing the rest of the stock market all year long. This has been a burden on the S&P500 because a sector like this should be leading the charge, not dragging it down. But if this sector is going to get going, this would probably be where it would start:

This is a chart of the Industrials Select Sector SPDR ($XLI). The $34 level is really what we’re watching. We have a slightly upward-sloping 200 day moving average, the 38.2% Fibonacci retracement off the October lows, and most importantly potential support from former resistance back in October & December:

If this space is going to get going, this would be the most logical area for a bounce to begin. Lower lows below last week’s reversal would be very damaging for the chart of the Industrials. $34 is the number.


Tags: $XLI $UXI $SPY

S&P500 Testing Key Fibonacci Support

We’ve seen a 9% correction in the S&P500 since the April 2nd highs. That’s not so bad after a 30% move in six months, right? Seems pretty normal to me. But have we seen enough to get a new rally going from here?

A month and a half ago the S&Ps broke their uptrend for the first time since October. We put up a post that day with Fibonacci retracement levels that could come into play as prices corrected. We said that day,

‘The number that stands out to me is the 1288-1290 area, for multiple reasons. First of all, this is the most obvious cluster of retracements: 38.2% retracement off the October lows, 50% retracement off the November lows, and 61.8% retracement off the December lows. Secondly, the late October highs that were not taken out until mid-January are right at these same levels. And finally the upward-sloping 200 day moving average should catch up to this area by the time prices get down that low (if they get down that low). This would represent a little bit under a 10% correction, keeping the set back in the ‘normal and healthy’ category.”

This was the chart we were watching at the time:

*Chart from April 9, 2012 

And 6 weeks later, here we are testing that important support. Will it hold? So far it has. But we’re getting some oversold readings in the Relative Strength Index that don’t convince me that we’ll be ripping to new highs from current levels. Could the lows be in? Sure. But that doesn’t mean we won’t see some further consolidation in equities before the next leg higher can really get going.

In early April, we put up a post warning that the Bearish Divergence in momentum made stocks vulnerable. As the S&P500 was making new 52-week highs, RSI was already rolling over and making lower highs. Sure enough, that was the top.

The problem we currently have is that we’re still not seeing any Bullish action out of our momentum indicators. In fact, RSI reaching oversold conditions is evidence of an extreme amount of sellers. We don’t take that as a good thing. So going forward, we just want to see last Friday’s lows hold because as we mentioned 6 weeks ago, this looks to be the most important support zone.

Look at the late October highs in the S&P500. We tested that former resistance successfully on Friday. So far, the market is following through this week, which is good. We may get some more of a pop out of this market, but I won’t be convinced of a new leg higher this summer unless we start to see some better action out of the more offensive sectors.

Look at the outperformance in the Defensive areas since early March – Utilities, Staples, and Healthcare all leading the way:

This chart shows the relative performance of each sector to the S&P500. Notice how the names you want to lead in a bull market simply have not. Until that changes, defense is key. Monday, some of the offensive sectors are leading, specifically the commodity based, more cyclical areas: Energy, Materials, and Industrials. Tech, Financials, and Discretionaries are also outperforming while the defensive sectors mentioned before are all struggling to stay positive. We want to see more of this sort of action and Friday’s lows hold in order for us to get more positive on equities.



Greek Stock Market Worse Than Great Depression

It’s pretty unbelievable to say that. But the Athens Stock Exchange has now fallen more than 88% from its 2007 highs. This outrageous number slightly beats out the 85% correction in US Stocks during the Great Depression.

Today’s chart comes from The Atlantic and shows the Athens Stock Exchange (in blue) with the S&P500 (in red) from their cyclical highs:

From Atlantic:

“I would say that this might be a good buying opportunity, except that Greek stock prices are at the same level they were back in November 1992.

It’s been two lost decades for Greek stock investors. And the austerity isn’t nearly over.”

Also See:

Greek Stock Market Falls 88% From 2007 High (Ritholtz)



The Greek Stock Market Has Now Fallen Over 88% (Atlantic)

Scott O’Neil on Defense First

This weekend we have a nice friendly reminder about the importance of risk management. The way I look at it, it shouldn’t even matter what your strategy is as far as how to pick a stock or put on a position. The important question to ask is, “Where am I wrong?”. In other words, worry less about things you have zero control over – in most cases, “How high can the stock go”. And worry more about the only thing that we can control, “How much am I willing to risk for that upside potential?”. So think about it, if the only thing that we can control in our portfolios is the risk, and everything else is up to the market, why should we worry about anything else?

I realize this is extreme. And I put it this way on purpose so that we can think more in those terms. W. Scott O’Neil wrote this letter on his site and I had to post some of it because I think this is such an important topic. Scott is the President of MarketSmith and portfolio manager with the O’Neil companies. His post on drawdowns and risk managements is dead-on:

“Too many investors approach the market with only one thought in mind: “I want to make money.” Frankly, that’s never the proper approach to something as risky as the stock market. But in a downtrend, it’s even worse, as the probability of making money is greatly diminished. One of the more common mistakes investors make is to buy or hold onto stocks during a downtrend. Whether out of pride, hope or paralysis of fear, most investors seem to dismiss the signs of a changing market trend.

The key to surviving a downtrend is to minimize your portfolio drawdowns by staying out of the market until the environment improves. You never know how far down the market will go before it bottoms, and you can’t assume your stocks will escape unharmed. Remember, a falling tide lowers all boats. It doesn’t matter how good the fundamentals are, or how compelling the story is. We would rather risk getting out a little too soon versus taking a severe hit to our portfolio. Remember, when a portfolio is down 33%, it takes a 50% gain just to get even.

Defense should always be the number one priority over making money, which means that your capital preservation strategy must be in place PRIOR to investing in ANY stocks. Following this “defense first” strategy has helped our shop immensely, especially in the bear markets of 3/2000-3/2003 and 2008. People often ask me, “How did your shop know that 2008 was going to be so bad?” We didn’t! But what we did know in November 2007 was that the market was starting a new downtrend.

We will never argue with a market that is clearly signaling the beginning of a new downtrend. This straight-forward analysis can only be done on a stock chart. A stock chart of the major indexes gives the investor the proper perspective on what the stock market is actually doing at the time as opposed to opinions of what the market “should” be doing. In addition to monitoring the indices, any investor that does not consult a stock chart prior to buying a stock is severely disadvantaged.”

Keep Reading Scott O’Neil’s Post in Full at MarketSmith


Also See:

Joe Fahmy on Protecting Capital (May 16,2012)