Utilities and Discretionary’s Lead, While the Bear Moves to the Refrigerator

• Posted by Greg Harmon
• on July 4th, 2011

What a difference a week makes. Just last week I was selecting wine to go with grilled Bear Steak (link below) and then the markets make an historic run higher. From a Select Sector SPDR perspective every sector had at least a 4 day run higher, many on increasing volume. I have put the Bear Steak back in a very cold spot in the refrigerator based on this action. But not in the freezer yet, given the negative outlook from the monthly charts (Macro monthly link below) just 1 market day ago. You have to play the market in front of you not the one you want to play.

So with everything sector rocketing higher how can you distinguish strength among the sectors. As I said earlier all had strong four days runs higher. All have steeply rising Relative Strength Indexes (RSI) and and increasing Moving Average Convergence Divergence (MACD) indicators. And all have moved above their upper Bollinger band. Just buy the market? Not so fast, lets go back to good old fashioned price and volume to unlock some differences.

New Highs

Two sectors made new multi-year closing highs on Friday, the Utilities Select Sector SPDR, $XLU and Consumer Discretionary Select Sector SPDR, $XLY. New highs definitely negate any downtrend should they continue to hold into next week. Of the two, XLU looks to be a bit stronger. Its run higher broke through the previous end of May high with large volume Friday, it never fell much below the 50 day Simple Moving Average (SMA), and all but the 20 day SMA remained sloping

Consumer Discretionary Select Sector SPDR, $XLY

higher through out the pullback and consolidation. In comparison, the XLY, as seem in the chart above, had declining volume throughout the four day rise and its SMA ‘s are all relatively flat. Both sectors look higher but look for the XLU run to be stronger.

Higher Highs

Four sectors are right behind the new market leaders making higher highs on Friday. They were the Materials Select Sector SPDR, $XLB, Industrials Select Sector SPDR, $XLI, Consumer Staples Select Sector SPDR, $XLP and Health Care Select Sector SPDR, $XLV. Each of these sectors had strong runs but still have some work to get above their previous April and May before a new uptrend can be shouted out. The chart below for the XLI shows the run up on increasing volume, what you look for

Industrials Select Sector SPDR, $XLI

in a bullish move. But increasing volume out of a lull, not new high volume. It also shows the SMA’s to be very flat and the RSI to be testing the technically overbought level. The XLB is nearly identical. Still price action is what pays and they look to have more upside. The other half of the group, as reflected in the chart for XLP below, rose on lower volume than exhibited throughout the

Consumer Staples Select Sector SPDR, $XLP

consolidation, not good, but is not as extended from the Bollinger bands, has more room for the RSI to run and has SMA’s that are sloping higher. The XLV is similar. These also look higher from a short term perspective. Higher highs are good but there are still a lot of diverging indicators among these sectors. They still need to prove they want to go higher.

Tag a Longs

The final three sectors, Energy Select Sector SPDR, $XLE, Financials Select Sector SPDR, $XLF and Technology Select Sector SPDR, $XLK look to have benefit from riding the coattails of the rest of market. As seen in the chart of the XLE below, they have SMA’s that are declining outside of the

Energy Select Sector SPDR, $XLE

200 day SMA, and moved higher on weaker volume. XLK has the strongest profile with a volume pop on Friday, while XLF is next with volume falling from an elevated first day move volume level. The good news for this group is that should the rally continue they have a lot of upside room in the RSI, and price to get to resistance.

I have the Bear steak in the refrigerator for the moment as there are still many diverging signs in the SPDR sectors and the broader market, but should the market continue higher through next week I will be moving it to the freezer for another time. In the meantime there look to be at least short term plays to the upside in all sectors with the strongest sectors being the XLU and then the XLY. Trade’m well.

Wine with Bear Meat & Sectors in Bear Markets

Macro Month in Review/Preview June-July 2011

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