SPDR Sector Review/Preview: The Dollar Floats all Boats

The market as a whole is poised to go higher, as I wrote in the Macro Review/Preview last night, with the declining dollar floating almost all boats.  Sector analysis reinforces the view that the rise is dollar inspired.  Let me explain. Three degrees of strength stood out in a review of the Select Sector SPDR charts this morning: Neutral, Positive (Between Neutral and Strong), and Strong. Notice there is no mention of Weak or Negative.   Let’s look at the differences.   Specifics for all of the daily charts can be found in my twitter and chart.ly feeds.

Strong
Materials Select Sector SPDR, XLB

Energy Select Sector SPDR, XLE

Industrials Select Sector SPDR, XLI

Consumer Discretionary Select Sector SPDR, XLY

Materials, Energy, Industrials and Consumer Discretionary sectors make up the group of strong charts. These charts all broke higher, consolidated and then resumed their runs higher. All three look strong going forward as well with rising Moving Average Convergence Divergence (MACD) indicators and elevated but not extended Relative Strength Indexes (RSI). The Materials, Energy and Industrials sectors as leaders should be no surprise with the dollar losing strength. Consumer Discretionary as a leader is countercyclical to these other leaders, making me cock my head, but with most sectors poised higher I will let it slide. Theory is nice but you have to work in reality.

Positive
Consumer Staples Select Sector SPDR, XLP

Utilities Select Sector SPDR, XLU

Health Care Select Sector SPDR, XLV

Looking at the charts of the Positive sectors, Staples, Utilities and Health Care, shows that there is really a very fine line between some I have labeled as Strong and these sectors. These sectors have been rising and look ready for more but are slowing their rise slightly. The trend is still up for these sectors but they are starting to show some signs of volume divergence as they move into consolidation phases. After consolidating they can move again.

Neutral
Financials Select Sector SPDR, XLF

Technology Select Sector SPDR, XLK

Finally the Neutral bucket contains the Financials and Technology sectors. I have written frequently about the Financial sector not participating in the rally and how it has been in a range for at least 5 months. It does not look to change with a flat RSI and MACD indicator. Technology has been a bit more volatile but is now consolidating near long term support and resistance, also with a flat MACD and RSI.

Is the light bulb going on? Materials and Energy leading with Staples and Utilities poised positively but Financials and Technology trailing. This fits with the standard model of sector rotation within the business cycle. And where does it say we are in that cycle? Late in the expansion phase. That is right, the broad market is rising and looks higher in an environment where investors are rotating into stocks in a way that indicates investors believe the business cycle is at the top and may soon fade. Why would the entire market be rising when the collective believes the business cycle is waning. The answer lies in the declining dollar, inflating prices of all assets in dollar terms. The market and sectors do not look so healthy when you measure them in other terms, such as the price of gold, but that is a topic for another day.

Watch the dollar for direction and trade’m well.

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