Weekly Sector and Intermarket Analysis

May 19, 2007: 10:16 AM CST

Here are recent charts from StockCharts concerning sector strength/weakness and intermarket relationships between Stocks, Commodities, Bonds, and the US Dollar.

sector-may-19.jpg

  • Energy (oil) prices have risen almost 5% since early April 07, leading the sector pack (which tends to be a negative sign)
  • Consumer Discretionary Spending and Consumer Staples took the hardest hit, loosing 3% each over the last month.
    • This is also negative because consumer spending drives so much of the economy
  • Technology and Industrials trailed gains in Energy.

Intermarket Relationships:

intermarket-may-19.jpg

  • Since the beginning of the year, the Commodity Index has actually outperformed the S&P 500 by a slim margin.
    • This is inflationary from a certain point of view.
  • The Bond prices have remained relatively stable/unchanged since the January.
    • We are seeing a divergence between the S&P and bonds.  Typically, these move together.
    • When bonds and stock prices diverge, this could be an early warning signs
  • The US Dollar Index has suffered the most since the beginning of the year.  This serves to temper gains in the stock market to an extent
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Relative Strength Charts

May 18, 2007: 1:27 PM CST

Although I don’t incorporate stock relative strength charts as much as I should, I am going to begin posting more on this concept as I better understand the implications that can be interpreted from adding this additional tool to the analysis arsenal.

Relative strength charts compare price change relative to another security (or index or asset class).  The concept of relative strength is important because time is money, and while you may be making a decent return on your trades/investments, you could potentially increase your returns by studying sector strength and stock strength within a given sector.

Here are two examples of stock comparison within an industry group.

Both Apple and Microsoft are heavily followed stocks, but quick, tell me which one would have made you more money in the recent past?

aapl-to-msft.png

The answer clearly is Apple (AAPL) because of the strong move it has experienced recently relative to Microsoft’s move.  This implies that newer technology and an alternative to ‘big Microsoft’ could continue to outperform.

Let’s look at another example between two major search engines.  Between Google and Yahoo, which do you think would have performed better recently?  I suspect most people would say Google because of its behemoth status as a stock and company.  Let’s look closer:

yhoo-to-goog.png

Actually, Yahoo would have been the better choice this year, in that its price appreciated stronger than Google’s (recently).  Of course, these stock prices are dramatically different (Google at $470, Yahoo at $30), yet when compared from a percentage standpoint, you would have been better off in the smaller, less hyped Yahoo (recently).

There is so much to be said on this topic, and I recommend studying more and playing around with as many relationships as you can imagine.

In StockCharts, to find relative strength charts, select Performance (as the chart type) and type symbols in this format:

GOOG:YHOO or DIA:QQQQ

The colon character will set-up the chart and the percentage change will allow you to compare relevant differences.

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Daily Index Charts plus Bonus

May 18, 2007: 1:15 PM CST

While 8 of the 10 items in the index of leading economic indicators registered negative, the market took it in stride and has continued its creeping trend higher.  Here are charts of the major indexes:

dow-may-18.png

russell-may-18.png

nas-may-18.png

Again, the Dow has held up the strongest in terms of relative strength.  To illustrate this point,  here is a relative strength percentage graph of the DIA (Diamonds – Dow Jones ETF) and IWM (Russell 2000 ETF)

dow-to-russell.png

Although the Russell outperformed the Dow for most of the year, since May, the large cap Dow has shown considerable relative strength as compared to the smaller cap index.

Relative strength is an illustrative concept studied by many technicians of intermarket relationships.  The technique can also be used to show strong and weak stocks within a given sector or industry group. A market analyst can use basic support/resistance and trendlines to highlight early changes to a particular relationship.

Notice the clear change in dominance that occurred in May with the Dow ‘breaking out’ of resistance and signifying a shift in trend, confirming the flight to quality at least in the short term.

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A few nice educational charts for May 17

May 17, 2007: 8:35 AM CST

Caterpillar:

cat-may-17.png

Caterpillar (CAT) recently pulled back (sharply, might I add) to the rising 20 moving average and found (temporary) support.

It’s still on a down day (currently) with a nasty gap, but aggressive trend traders (and swing traders) could have (or still can) establish a position here with a tight stop should the average be breached on high volume (which would signal a trend trading exit for all those long CAT since February or earlier).

We see a momentum divergence with price (in terms of swing highs) so this serves as a caution point (not enough reason to exit).

Goldman Sachs (GS)

gs-may-17.png

We see consolidation at the moving average and should be expecting an expansion move (in either direction) yet odds favor expansion upwards (because of the trend/price structure).

Here would be a nice place to consider entry IF you wish to trade this stock long and believe in its fundamentals or sector strength (only you can determine this).

We do see a momentum divergence, which is what I’m seeing across many stocks.  Again, this is a warning, not a reason for a counter-trend trade.

Alcoa (AA):

aa-may-17.png

Alcoa has no doubt shown some impressive relative strength recently (in terms of Dow components).

Observe the new price and new momentum high (recently) suggesting a higher probability for higher prices following a pullback (which is occurring).

Now is probably not the time to enter Alcoa if you’re a swing trader – instead wait for the pullback.  Better yet, wait for the “Impulse Buy” trade I describe to set-up (when price pulls back to the rising 20 period moving average following a new momentum high.  Play for only the most recent price high).

AA has increased roughly 30% since the beginning of this chart (January).  For any stock, this is an impressive feat but especially for a Dow Jones component!

Finally, Apple (AAPL)

aapl-may-17.png

Apple has been highly praised in the media and by analysts (and traders) and we see its impressive trend-expansion (run-up) of $20 since late April and $30 since February.

Notice that we are making new price and momentum highs in the stock, indicating strong momentum and probability for higher prices later.

I’d still like to see the pullback, but realize that in the strongest stocks, they don’t often bear fruit – sometimes you have to grit your teeth and buy at high prices (buy high, sell higher).

I’d recommend following this stock and seeing if it pulls back and taking a position if the stock fits your particular strategy.

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Dow View May 17

May 17, 2007: 8:21 AM CST

A reader informed me I failed to include the Dow chart in the recent chart analysis so here is today’ s Dow Jones action – the Dow has held up the strongest in the recent environment, perhaps because of capital flowing into larger capitalized securities.  The Russell (small cap) is still showing relative weakness.

dow-may-17.png

We see declining momentum, which is characterized by all the indexes which serves as a warning, and not a reason to exit long positions.

All moving averages have formed a highly bullish angular pattern and continue to rise (look at how nicely the 200 period average is rising – about a 33 degree angle).

A trend is clearly developed, and odds favor continuation, yet trends do end at some point, so I’m not suggesting to bet the farm with new longs in the current environment, but to enjoy the ride and marvel at the recent strength.

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