Keystone's Sector Summary 5-3-11

Keystone monitors a dozen major sectors to help gauge the overall tenor of the markets; energy XLE, basic materials XLB, technology XLK, telecom IYZ, utilities XLU, financials XLF, consumer staples XLP, consumer discretionary XLY, industrials XLI, healthcare XLV, trannies IYT and real estate IYR.

XLE; energy sector, professionals play energy in concert with the ISM number always released the first of the month.   Typically energy moves upwards the last couple days of the month into the first couple days of the new month.  Yesterday, however, XLE dropped 1.3%, have to watch today to see if the negativity continues signaling an end to this multi-month trade, or not.  Daily chart is rolling over, nothing attractive there at all, negative divergence. Weekly chart the same look, price moves up for new highs as indicators continually weaken; topping and rolling over behavior.

XLB; basic materials keep riding the commodity trade, charts are similar to XLE, daily chart is up for another price high but negative divergence across the indicators.  Weekly chart negative divergence across the three month period but the indicators have tried to hold a long and strong profile for this latest price move over the last month.  Typically, price will pull back but then will want to come up for one more matching high again, then negative divergence will be firmly in place for XLB to roll over.  Charts are consistent with topping and rolling over behavior.

XLK; technology has not made a higher high compared to the February top but is very close.  A move to 27+ will seal the negaive divergence in for the last three to four months but the recent action over the last three weeks shows indicators that are agreeable to another price high.  Thus, daily chart will want to come back up after any pull back and more than likely print a higher high than February.  This will lock in negative divergence, especially on the weekly chart, which is bearish moving forward.  Daily neutral, some buoyancy expected.  Weekly topping and rolling over, bearish for the weeks ahead, a move to 27+ in the days ahead is expected which may be the highs for the year.

IYZ; telecom daily chart currently receiving the negative divergence smack down, RSI was a hair above early April, so a move back up for a matching high would be expected.  Other than that, telecom is topping and rolling over. Potential head forming now for a H&S pattern.

XLU; weekly chart is negatively diverged so thinking weeks and months, the outlook is not good and utilities will lead the broader markets.  In the shorter time frame, daily chart exploded to the upside, no doubt some serious POMO pumping to elevate the utes, and there is success in this short time frame to show that after a pull back occurs, price will want to come up again to current levels to set up the negative divergence.  So, on the daily basis, down, then back up, then roll over.  Weekly chart will move along for this ride in the short term, long term down.

XLF; financials very weak these days, 2-10 spread continues to inch lower which is not good for bankers, lawsuits, Wiki leaks, lots of negativity around this sector lately.  Charts have trended lower since the February top and are not even close to making a high above February. Daily chart has started to move out sideways, there is nothing good to say about the financials.  Broad markets will have trouble moving higher unless the financials turn happy.

XLP; staples moved up 10% over the last month, and the move does have some continued strength ahead, as shown by the RSI's, after a pull back.  Traders looking for safety since we all need toothpaste, soap and toilet paper.  A pull back is in order but price should move back up to current levels again before rolling over with the broader markets in the weeks ahead. 

XLY; discretionary, think fancy cars, Tiffany's for your honey, overpriced electronics, all the fun stuff.  Weekly chart is bearish, negatively diverged and fully agreeable to continued down trend.  Daily chart jumped higher the last few days but negatively diverged over two month time frame.  Over the last three weeks, however, indicators do favor another move up to current highs.  Thus, daily chart wants to pull back down, but then back up to these levels, then roll over.

XLI; industrials showing the two month negative divergence but RSI strength over the last month.  Topping and rolling over behavior.  Pull back is in order but prices will come back up to match current levels again, then roll over for sideways to sideways down for the weeks ahead.

XLV; healthcare jumped big recently like staples, money is trying to find hiding places for safety from any broad market pull back.  With the overbot conditions, a pull back is in order but these daily and weekly charts are the strongest of all sectors.

IYT; trasportation weekly chart is negatively diverged over the three and four month periods, as well as the one year period for the RSI. The strength over the last month, however, with the RSI and stochastics, says that price will want to come back up to these current levels again after a pull back.  Daily chart same idea, it wants to pull back but then the indicators want to see price come back up again to these current levels.

IYR; real estate weekly chart showing topping and rolling over behavior, negative divergence in place. Daily chart has experienced the pop lately similar to staples and healthcare.  Many traders must not believe the double dip scenario.  Price wants to pull back but indicators show that a move back up to current levels should occur and at that time the negative divergence can be assessed.

Chairman Bernanke's hot easy POMO money has floated the indexes skyward; the money has to go somewhere and much of it moved into basic materials and energy.  Rating the sectors moving forward from worst to best, using the weekly charts since the daily charts have too much noise for this type of analysis, would be IYZ, XLY, XLI, XLE, XLB; IYT; XLF; XLU, XLK, IYR; XLP, XLV.  Obviously, this technique is open to lots of subjectivity but several conclusions are drawn.

First, the sectors that appear at their tops now, and ready to roll over, are telecom, discretionary, industrials, energy and basic materials. Those are some heavy hitters that have enjoyed a nice long two year rally. Trannies are in the same boat but they would at least be agreeable to a slight bounce after any intial down move.  Financials have been trending lower for the last three months.  Utilities typically lead the broad markets and the charts are agreeable to a move down although not as convincingly as the first group.  Utilities, technology and real estate would be happy to float where the broader market goes, be it down or up.  Staples and healthcare are the strongest sectors moving forward as money moves in as a safety play.

Sector analysis also helps correlate current conditions to economic cycles.  Staples and healthcare are used defensively.  Technology and financials typically move together so their general weakness will keep a lid on any further upside in markets, unless their behavior changes.  The behavior with utilities will be key to the broad market direction moving forward, if an extended down move should occur for the broad markets, the utes should lead the move down.

Thus, monitor telecom, discretionary, industrials, energy and basic materials as they top and roll over. The behavior of these sectors will verify the analysis above, or, rebuke it.  Sector analysis is a very fluid process and requires constant weekly reassessment.