Synaptric

Sector indices are near 52-week highs as a result of Q1′s positive price action.  Examination of metrics on the nine primary sector ETFs reveals a distintly defensive tilt as the quarter ended.

First let’s examine momentum using the relative strength indicator (RSI).  The following chart depicts momentum change over the last ten trading days.  Utilities (XLU), Consumer Staples (XLV), and Healthcare(XLP) are known as defensive sectors and these are the three with highest score.  The only two sectors with positive slopes are Healthcare and Utilities.  But of particular note is the clustering of the three “risk off” sectors near the top of the graph and the “risk on” sectors near the bottom.  Despite the negative slopes note seven of the “risk on” sectors remain above 45 suggesting that bearish conditions have not quite gelled.  Only the Materials (XLB) ETF has crossed below 45.

Second let’s examine volatility using the coefficient of variation.  Standard deviation is a useful measure of volatility and in each case the ten-day standard deviation has been divided by the ten-day moving average so that they may be comparably compared.  The following chart depicts change in volatility where a positive slope indicates price expansion and a negative slope indicates price compression.  Six of the sectors exhibit price compression indication their upward trend could be pausing.  The three sectors exhibiting price expansion are the three defensive sectors.

Third let’s examine trend using the relationship of price to its moving average.  The following chart depicts trend by showing change is price relative to moving average for each sector ETF over ten trading days.  In each case the price is expressed as a percent of its ten-day moving average.  Any number above zero indicates a bullish tendency but more interesting is whether this tendency is increasing or decreasing.  The chart shows Consumer Staples as having the greatest strength and Financials (XLF) as exhibiting the weakest.  Note again the presence of the three “risk off” sectors near the top of the chart.

For several months followers of Dow Theory have voiced concerns that the Transports were not confirming the Summer rally.  (One of many examples http://seekingalpha.com/instablog/193926-gary-jakacky/898601-dow-theory-and-the-summer-2012) Examining a longer-term chart reveals deeper concerns.

Note the local peak for both Industrials and Transports in April 2010.  Following a healthy correction, both indices powered past that mark before year’s end and marked new highs mid-2011.  From that point we have seen two different behaviors. The Transports fell back to test the Summer 2010 low, while the Industrials pulled back to a higher low.  During the early 2012 rally, the Industrials reached a new high while the Transports met a lower high (March 2012).  The Transports have continued to exhibit lower highs ever since.  Meanwhile the Industrials have been marking higher lows. While one would expect the Industrials’ upward trend to continue (given continuous Fed stimulus and a few encouraging signs regarding housing and jobs), Dow Theory suggests that without confirmation from the Transports, the Industrials’ uptrend will fade.  On the positive side, the Transports have repeatedly shown support at the March 2010 resistance point near 4800.  The Transport’s stubborn price support gives a bull encouragement. Should the US economy continue to recover and oil continue to stay below $90, the individual company story for each of the transportation sector components brighten.  Given the duration of the Transport’s basing period and these bright prospects, a pop in Transports may well turn into a sizable one.  Sizable enough to confirm the Industrial’s rally.  However, should the economic recovery falter and fighting in the Middle East threaten oil supply, the Transports will be particularly hurt and possibly fail their support, bring the Industrials down with them.