Charting the Top Three Strongest Stock Market Sectors at New Highs

Jul 12, 2013: 9:22 AM CST

With the US Stock Market closing again at all-time highs into the 1,675 target, let’s take a moment to look under the market at the Top Three Sectors (ETFs) also at new all-time highs (not all sectors are participating equally in the rally).

We’ll start with a Comparison Chart of the Top Three Sectors:

Sector Rotation Comparion Top Three Sectors XLI XLF XLY

The chart above is a Percentage or Performance Comparison view where we start with the May 22 high (it was the high for all three sectors along with the SP500) and then compare percentage/performance on the hourly chart to today.

While the percentage chart doesn’t quite capture it, all three sectors (and the SP500 itself) closed Thursday above their respective all-time highs.

So far, the Financial Sector (XLF) closed and traded the strongest above the May high while Industrials (XLI) squeezed out a small trade above the May high (Financials – XLF – fell a few pennies shy).

Nevertheless, our focus again is on the Consumer Discretionary or “Retail” sector as I highlighted earlier this week.

Let’s look closely at the XLY Consumer Discretionary Sector (ETF):

XLY Consumer Discretionary Sector Top Performer

For pattern traders, we see a clean “Bull Flag” or “AB=CD Measured Move” pattern into the current $59 level.

The initial impulse or “Flagpole” took price from $53 to $58 per share ahead of a “Flag” correction/retracement to $54 which gave way to the day-over-day sustained upward impulse above the May high.

Also as I highlighted, we continue to see strength in the more specific Retail Sector ETF (XRT).

Volume has been relatively strong (note the highlight) and the momentum oscillator pushed to new highs not seen in all of 2013 (both of these are signs of confirmation of the uptrend and bullish money inflow).

While you can swing-trade the ETF itself, you can also do a little extra work and find the strongest stocks in the strongest sector at the moment.

Next-up is the Industrial Sector (XLI):

XLI Industrials Sector SPDR ETF Top Performer

The strength in Industrials may be surprising to some traders, particularly those who have been focused on popular names and sectors such as Technology, Retail/Discretionary, and of course Financials.

We see a similar “Bull Flag” pattern but it’s not as strong or not as impulsive (strong) as the Discretionary Sector.

Nevertheless, money still continues to flow into big company names and we can drill-down to specific companies in the sector such as General Electric (GE), United Technologies (UTX), Union Pacific (UNP), and Caterpillar (CAT) which are some of the top holdings of the XLI ETF.

United Technologies (UTX) traded impulsively higher and broke above the $100 per share barrier this morning.

The third strongest sector relative to the May peak is Financials XLF:

XLF Financial Sector SPDR ETF Top Performer

The Financials sector traces a similar price pattern to Industrials as the Bull Market or Primary Uptrend continues seemingly without end.

Patterns of relative volume flow are similar to Industrials but noticeably weaker than what we’re seeing on the chart of Consumer Discretionary (XLY) and momentum is at a lower level than what’s seen in the Discretionary sector as well.

Although we saw a sharp sell-off on Thursday – ironically the same day the SP500 closed at an all-time high – the sub-sector Regional Banks (popular ETF symbol KRE) has been strong within the sector.

Do be cautious of the sell-bar and overextended nature of the Regional Banks – we’ve seen a lot of attention and money flow into this hot sector and price can fall quickly after a stellar rise.

Top holdings in the broader Financial Sector (XLF) ETF include JP Morgan (JPM), Citigroup (C), Bank of America (BAC), AIG (AIG), and Goldman Sachs (GS).

If you’re curious, which sector has been the worst performer relative to the May peak?  It’s Utilities.

XLU Utilities Sector SPDR ETF Worst Performer

As I highlighted in a May 28 blog update entitled “One of these Defensive Sectors is NOT Like the Others,” Utilities underperformed at that date and continued to do so relative not just to the broader market, but to the two other Defensive Sectors of Health Care (XLV) and Consumer Staples (XLP).

Pay special attention to the fact that the XLU Utilities fund peaked on April 30th, almost a full-month ahead of the May 22 sector and stock market peak, further underscoring the weakness in the sector.

Continue to monitor relative sector performance for additional insights into investor expectations and trends in money flow (Offensive or Defensive).

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Corey Rosenbloom, CMT
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