Monthly Sector Leaders Hint the Worst Aint Over Yet

• Posted by Greg Harmon
• on December 1st, 2011

I have not published a sector review in a few weeks but it appears that the leaders have not really changed from looking at the monthly charts. Guess which are the best looking? Consumer Staples Select Sector SPDR, $XLP and Utilities Select Sector SPDR, $XLU are leading the pack. For those that follow sector rotation analysis and the economic cycle having these defensive sectors lead the rally higher does not make a strong statement about the economy. Will this change soon? Let’s take a look and see what they are telling us.

Consumer Staples Select Sector SPDR, $XLP

Consumer Staples Select Sector SPDR, $XLP, had a strong run from the March 2009 lows until May this year, with a pause through the Summer of 2010. But there are several indications from the chart that it is about to have a strong run higher. The May high was at the 138.2% Fibonacci extension of the retracement of the 2008-2009 move lower. After retesting the 100% level it is now back at that 138.2% extension with a strong white candle, looking higher. The Relative Strength Index (RSI) which has remained bullish, is pointing back higher again and the Moving Average Convergence Divergence (MACD) indicator has averted a negative cross and is increasing again. Both support more upside. All of the Simple Moving Averages (SMA) are sloping higher as well. The price action gives two indications of the potential extent of the next move. First there is a Measured Move (MM) to 36 from the comparable move from May 2010 to May this year and the Inverse Head and Shoulders has a similar price objective of 36.17, another 13% higher.

Utilities Select Sector SPDR, $XLU

The Utilities Select Sector SPDR, $XLU just continues to run higher toward the December 2008 highs. The RSI continues to trend higher and is just breaking the 70 level, far from being extreme, while the MACD hums along in positive territory. The next resistance comes at 36.65, the tops of the shoulders from the 2007 through 2008 Head and Shoulders pattern before a retest of the 39 high.

There may be concerted intervention, quantatitive easing and oodles of other things going on but the $XLP and $XLU are stating that they are not done leading yet. Keep an eye on these two sectors for signs that their leadership is waning. Until then they suggest a defensive posture.

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