Sector Analysis July 2008

07/17/2008 12:00 am EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

With the current carnage in many sectors of the stock market, I thought it would be a good time to examine the ten major sectors to find any sectors that might be trying to gain leadership. Even though the evidence suggests we are in a bear market, when it is over, the sectors that improve as the market is declining often become the new leaders once the bear market is over.

Table 1

a

 

The table above looks at the ten major market sectors, along with the S&P 500 Index. We have taken the recent close (7.11.08) along with the 2007 ending price and the 4.30.08 ending price as the bear market rally ended in early May. I have selected these dates in order to gauge: 1) how the sectors have done this year and 2) how well they have held up during the recent market decline.

Of course, it will come as no surprise that the Energy Sector is the only one in positive territory for 2008 or that the financials are the weakest, down 36% so far for 2008. It might be more surprising to note that despite the commodity boom, the Materials Sector is down for the year and has lost 6% since the end of April. The Health Care sector, for example, is down just 2% while the Consumer Staples sector is down 4%. Compared to the 10% decline in the S&P 500 they look pretty good. In fact, it is the performance since the end of April that I will focus on after reviewing the technical outlook for the current market leaders.

Figure 1

a

The Energy Sector peaked in late May and closed on its uptrend (line B) in early July, with the long-term uptrend in the 500 area (line A). It is more important to look at the RS chart (discussed in previous articles) which looks at the relative performance of the sector against the S&P 500. The RS is in a powerful uptrend (line 3) and is well above its rising WMA. In September 2006, the multi-year uptrend (line 1) was broken after the RS formed a short-term divergence (line 2). This divergence reflected the underperformance of the Energy Sector during that period. The downtrend (line 2) was broken in early March 2007 as the Energy Sector began a new uptrend. The absence of any divergences currently indicates there are no signs of a top, as it should continue to outperform the S&P 500.

Figure 2

d

The Utilities Sector has also done better that the S&P 500 in 2008 as it is up 1% since April 30th and the long-term chart still shows an uptrend going back to early 2003. This uptrend was briefly violated earlier this year and the Utilities have not yet surpassed the 2007 highs. Key support is currently at 185 and a break of this level would indicate that the RS needs to be monitored more closely. The RS looks much more positive as it broke out to new highs (point 2) just a few weeks ago and shows no signs yet of a trend change.

Figure 3

f

The Materials Sector is down 5% for the year and 6% from the 4/30 close, but more relevant is that it is down over 14% from the May 23rd reversal highs, point 3. The sector is now back to first good support in the 235 area with more important support (line A) in the 215 area. The RS has tested its uptrend two times already this year but is still positive with its WMA rising. A convincing break of this uptrend would be the first indication that this Sector was beginning a period of underperformance.

Figure 4

f

The Consumer Staples Sector has been in the bottoming process since the latter part of 2007 when the 4-? year downtrend in the RS (line 1) was broken. The more important resistance (line 2) was overcome in November (point 3), suggesting it was becoming a leading sector. The RS has turned up sharply in the past three weeks and broken out to new highs. The weekly chart of the sector has just tested its longer-term uptrend (line B) and is down 4% from the April 30th closing level. The weekly chart shows what appears to be a continuation pattern and a move above resistance at (line C), should signal that the correction is over.

Figure 5

f

One of the sub-industries of the Consumer Staples Sector, which looks quite interesting, is the Beverages. The S&P 500 Beverages spiked to a high of 315.40 in early January but has been correcting since, and is down 15.6% from the highs. The long-term weekly chart shows that it is approaching converging support in the 250-260 area (lines A and B). The weekly momentum (not shown) is still declining, so the stronger support may be tested. The RS chart shows that the downtrend going back to the 2004 highs (line C) was overcome in mid 2007. The RS has since formed a short-term uptrend (line D) and the RS has moved back above its flat WMA. This short-term uptrend bears watching since as long as it holds this should be an outperforming industry.

Figure 6

f

From Table 1, you will see that the Health Care Sector is down 12% for the year but just down 2% from the April 30th closing level. When you compare this with the 10% drop (since 4/30) in the S&P 500, the Health Care sector begins to look good. The weekly chart shows that the uptrend going back to the 2003 lows was broken over the past few weeks though it has now closed back above it. Therefore the action over the next 3-5 weeks will be important. There is a significant band of support in the 332-342 area (line A). The RS has turned up sharply and moved back above its WMA but is still below long term resistance (at line B). If support at line C is broken, it would indicate that the sector is underperforming and the bottoming formation in the RS has been aborted.

Figure 7

f

Within the Health Care Sector there are two interesting sub-groups. Biotechnology looks the most interesting as for 2008 it is up 15.6% and up over 11% from the April 30th close. From the weekly chart you can see that the group bottomed in the 900 area early in 2008 and has been moving higher since. The next resistance (line A) is in the 1150 area. The RS broke out of its multi-year trading range in late June and has accelerated to the upside. It is well above its sharply rising WMA.

Figure 8

f

Another sub-industry of the Health Care sector that looks attractive is the Health Care Equipment and Supplies. The weekly chart shows a tight trading range since early 2007 with resistance at 590 and support at 525. For 2008 the group is up just 2.5% and is pretty much unchanged since April 30th. The RS once again looked much more interesting as it moved through its downtrend (line 1) in early 2008. The RS retested its breakout in mid-May (point 2) and surged to new multi-year highs in the past few weeks. This suggests that the industry will also breakout to the upside. A move above 590 will give upside targets for this sub-group in the 650-660 area.

I hope this review of the major sectors will give you some areas to examine as even in a bear market it is a good idea to run the weekly RS scan on all of the major sectors each week. This will give you some guidance as to which sub-groups you should examine in more detail.

Here are links to the two earlier articles on sector analysis that you may find interesting.
tebiwkly110707 -Know Your Sectors
tebiwkly081607 -Scanning the Sectors

.As always I welcome your feed back on these articles and I can be contacted at tomaspray@intershow.com. I would also appreciate any suggestions you may have for future articles.

Tom Aspray, professional trader and analyst, serves as video content editor for InterShow's MoneyShow.com Video Network. Mr. Aspray joined InterShow full time in June of 2007 where he also does other editorial work for the site, including the bi-weekly trading lessons and the weekly charts to watch. Mr. Aspray has written widely on technical analysis and has given over 60 presentations around the world. Over the years, he has applied his methodologies not only to the stock and commodity markets but also the global markets, mutual funds, and foreign exchange. Many of the technical indicators that Mr. Aspray wrote about in the 1980s, such as the MACD, have since gained worldwide acceptance. He was originally trained as a biochemist but began using his computer expertise to analyze the financial markets in the early 80s. As a consultant, Mr. Aspray wrote daily institutional reports for firms such as Fleming Jardine and Barings Bank and was noted by the Wall Street Journal as one of the "top bond market technicians."

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