Sector Review December 18, 2010

As I studied the daily and weekly charts of the SPDR Sector ETF’s this weekend there were two key points to note. First, the recent move up has been very broad based with all sectors participating. Second, the sideways action in the market this past week, thought by many to be a sign of a top, may have been caused merely by sector rotation. This reminded me of the old Blood Sweat and Tears song Spinning Wheel.

What Goes Up Must Come Down?

All nine sector SPDR ETF’s have similar price movement in their charts for the past 6 weeks. Using the Technology Select Sector SPDR, XLK, below to illustrate, there was a peak in November followed by a pullback and then a move higher the last three weeks. This is what I mean when I say the breadth of participation has been high. Of course the shape of those 6 candles is varied with some barely pulling back and making new highs and others pulling back more and not yet fully recovering. But the point is that all sectors have risen over the last 3 weeks.
Technology Select Sector SPDR, XLK

With the S&P 500, Russell 200 and Nasdaq 100 all at multi-year highs, there is naturally talk about a possible pullback in the market when it move sideways, but the strength of the sector SPDR weekly charts suggest otherwise. What goes up does not have to go down.

Spinning Wheel, Got to Go Round

Let’s focus in on that last candle on the weekly chart now. For XLK it was a small body red candle, but for others it was a small body White candle and others a Doji, or no real body. Exploding out to the daily charts reveals the key to last week. I have noted here for weeks that the Energy Select Sector SPDR, XLE and Consumer Discretionary Select Sector SPDR, XLY have been the strongest sectors with Materials Select Sector SPDR, XLB and Industrials Select Sector SPDR, XLI right behind them. The weakest have been Financials Select Sector SPDR, XLF and Utilities Select Sector SPDR, XLU and doing slightly better have been Technology Select Sector SPDR, XLK, Consumer Staples Select Sector SPDR, XLP, and Health Care Select Sector SPDR, XLV. That changed this week. Look at the charts of two leaders over the last 2 weeks, the XLE and XLY.
Energy Select Sector SPDR, XLE

Consumer Discretionary Select Sector SPDR, XLY

Both show stagnation over this period with a pullback this past week. Not an outright change in trend, but a subtle move slightly down or at least sideways. Now look at the charts of what have been the best of the worst, XLP and XLV.
Consumer Staples Select Sector SPDR, XLP

Health Care Select Sector SPDR, XLV

There is no pause in these charts. Just a move higher. Sure there was a pullback from a massive move on Thursday but nothing that impacts the trend. This is a sign of rotation from the Energy and Consumer Discretionary sectors into the Consumer Staples and Health Care sectors. These new leaders are dubbed defensive sectors, which adds to the noise about a top forming, to which I say, look at the weekly charts.

Still not convinced that rotation is occurring? The final two charts below are ratio charts. The first compares the Consumer Staples sector to the Consumer Discretionary sector, XLP/XLY, and the second Health Care to Energy, XLV/XLE.


Both show after bottoming in early December a steady rise in the relative price, the RSI and the MACD. Consumer Staples rising relative to Consumer Discretionary, and Health Care rising relative to Energy.

So Blood Sweat and Tears only got it half right, What goes up does not have to go down (yet at least) but the spinning wheel has got to go round.

Trade’m well.

(As always you can see details of these individual charts and more on my twitter feed and on chartly.)

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