Sector Review December 24, 2010: Stick With the Kenyan’s

• Posted by Greg Harmon
• on December 24th, 2010

It is almost year end, and it has been a long year with a lot of ups and downs for the market. A real life marathon for those of us participating in it. This morning that theme is in my head as I review the SPDR sectors. Often hindsight helps in understanding and recognizing a trend that you could not see without that broader perspective. As I look back over the last 3 to 4 months, coming into the end of this year’s marathon there are clear distinctions between the sectors and how they are performing. There are the career Marathoners who know the race and steadily work toward the end. There are those that have run distance but held something back as this was their first marathon and are now kicking into the finish, the Novices. And there are the Gentry, those that are past their prime. They have been leaders previously but not able to sustain it now and are running then resting and then repeating, as they limp across the finish line.

Marathoners

This group contains the lead pack, Materials Select Sector SPDR, XLB, Energy Select Sector SPDR, XLE, Industrials Select Sector SPDR, XLI, Consumer Staples Select Sector SPDR, XLP and Consumer Discretionary Select Sector SPDR, XLY. Within this group there are two clear leaders, the Kenyan’s if you will, XLE and XLY. The chart for XLE is below.
Energy Select Sector SPDR, XLE

Notice that since September there has been a solid trend higher. A few steps sideways to the 20 day Simple Moving Average (SMA), letting someone else in the pack take the lead briefly, but always up, always a 5 minute mile.
These two sectors are up over 22% since September. Notice what a strong steady trend looks like. The Relative Strength Index (RSI) drove to the 70 level and has stuck there. The Moving Average Convergence Divergence (MACD) indicator has been narrowing on the zero line, and the SMA’s are nearly parallel and rising with the price action. Like the Kenyan’s after a marathon, they seem ready to pick up their flag, drape themselves with it and go run another marathon waving at the crowd.

The others in the lead pack, XLB, XLI and XLP, try to keep up with the leaders but have some periods where they are not firing on all cylinders. They recover and resume the quest for the lead, but cycle through thrusts and rests. XLB is a good example of these and the best of the bunch. the chart is below.
Materials Select Sector SPDR, XLB

This chart also shows a clear trend higher, although with more variability, up over 18% since September, like the American’s racing forward with a couple of sub 5 minute miles but then needing a six minute mile to rest a bit. Notice the RSI moves to 70 then falls back to 50 and then repeats. The MACD also shows higher peaks and troughs unlike the steadily shrinking range of a steady trend. They will do well but are more influenced by the broad market than the straight trending leaders.

Novices

This group is one to keep your eye on for the future. Like new young runners that are still getting a feel for the race, they take only off quick early but then rest in the middle saving energy for the end only to realize they have too much strength left at the end. These sectors are showing signs of a strong finish after a long rest. They are Financials Select Sector SPDR, XLF and Utilities Select Sector SPDR, XLU. The chart for XLF is below.
Financials Select Sector SPDR, XLF

XLF had a quick start in September and then stalled. The RSI came off of an oversold 30 level up above 50 and held, but could not get to a strong 70 level until a small burst of speed in early November and now again. The MACD has bounced all over the place. But isolating the month of December, the last 3.2 miles, XLF has been very strong, breaking higher, a healthy pullback and then higher again. There is still some energy in this group to spend so this group is one to watch for the next marathon, 2011.

Gentry

this group are the contains the seasoned veterans. Those that have been stars and get a lot of attention, but it is not clear whether they are still on top of their game. The Joan Benoit-Samuelson’s if you will. It contains the Technology Select Sector SPDR, XLK, and Health Care Select Sector SPDR, XLV. The chart of XLK is below.
Technology Select Sector SPDR, XLK

Like a more ‘experienced’ runner, the XLK had a great first half but then faltered and is having a hard time recovering, lessening the pace to make it through. The RSI ran quickly to above 70 and stayed there but then fell off a cliff and is now leveling below 70. The MACD looks similar with a big up initially and then an equally big move to the negative side before recovering but lower. With more training (time), this group could recover and have a strong showing again, but they are not going to lead.

The Next Marathon

Next week will be a thinly traded, potentially volatile week. Beyond that the next marathon begins for 2011. There will likely be more crisis and concern. lots of peaks and valleys of sentiment about the market and the economy. As I prepare for it my apologies to Joan, but in the early handicapping, I am going to stick with the Kenyan’s.

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