Sector Review 8-21-2011: Capitulation Rotation

• Posted by Greg Harmon
• on August 22nd, 2011

Last week there were nine hammers on the 9 Select Sector SPDR ETF’s, and exactly 2 of them confirmed reversals higher. These were the Consumer Staples Select Sector SPDR, $XLP and Utilities Select Sector SPDR, $XLU. Uh oh! Aren’t those the defensive sectors? The other 7 sectors all have some differences between them but let’s face it, they are all looking like crap. Each of the other 7 printed a bearish engulfing candle for the past week and are now targeting their next support at least as far back at September 2010. Everything falling except for Staples and Utilities? This type of rotation shows a market that is flirting with disaster. I call this type of Sector rotation a Capitulation Rotation. Let’s take a quick look.

Utilities Select Sector SPDR, $XLU

The $XLU was the biggest winner, up over 0.6% for the week and is still holding onto the 61.8% Fibonacci retracement area near 32.16 as support. The Relative Strength Index is looking up and the Moving Average Convergence Divergence (MACD) indicator is level and maybe starting to improve towards the zero line. It also has several of the Simple Moving Averages (SMA) pointing higher still. If you need to be invested look here for protection. Close behind is the $XLP which finished the week positive by 1 penny. The chart below shows the RSI is not in such good shape

Consumer Staples Select Sector SPDR, $XLP

though it may be turning and the MACD is growing negative. The SMA’s are all rising though and support at 29 is not that far off. Remember, these are the two strongest sectors. Again, uh oh!
The only minor distinction between the other 7 sector funds is where they are relative to their SMA’s. Four, the Energy Select Sector SPDR, $XLE, Technology Select Sector SPDR, $XLK, Health Care Select Sector SPDR, $XLV and Consumer Discretionary Select Sector SPDR, $XLY have not yet broken their 200 week SMA as shown from the chart of $XLK below. This is the worst of the lot and the only one that has closed below it’s 100 week SMA. All of these have MACD’s that are

Technology Select Sector SPDR, $XLK

growing more negative and RSI’s that are falling but have not yet hit 30. The slightly worse group includes the Materials Select Sector SPDR, $XLB, Financials Select Sector SPDR, $XLF, and Industrials Select Sector SPDR, $XLI. Each of these closed under the 200 week SMA and only the $XLB has a RSI over 30. The worst one, $XLF shown below, is actually in a class by itself trading at levels from late 2009.

Financials Select Sector SPDR, $XLF

Staples and Utilities are anchoring themselves as the Financials, Industrials and Materials sectors lead the way lower. A Capitulation Rotation. And it does not look like it is done from the weakness in those seven sector charts. Stay in Utilities if you need to be invested, short the Financials, if you can take on short side exposure. Otherwise stay out unless you are day trading, or you are flirting with disaster.

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