Trend Review: US Sectors

Let's take a look at the long-term trends for the 10 major US sectors. For this review we will be looking at 3-year weekly charts. I like the weekly charts when reviewing long-term trends because they eliminate a lot of the noise we get with daily volatility. It's important to step back and look at the big picture during times of choppy market action like we've seen this summer.

Each weekly chart will show the price and volume action along with the 10-week and 40-week moving averages. For this review I will analyze each sector long-term trend by identifying where the price is in relation to the 40-week moving average which acts as a long term trend line.

Financials (XLF)

• -27.2% YTD
• TREND = DOWN. Financials, by far, have been the worst performing sector in the market this year. The primary trend for financials remains firmly down. I don't expect a trend reversal anytime soon. See my previous post for a deeper review on financials, and the signs I will look for to turn bullish.

Energy (XLE)

• -13.42% YTD
• TREND = DOWN. Energy stocks had a nice run until the end of June. The surge in the price of oil certainly contributed to that. However, after peaking, oil has plunged and energy stocks are currently in a down trend. The price is below both the 10-week and 40-week moving average. The 10-week average recently crossed below the 40-week which is a bearish signal.

Consumer Discretionary (XLY)

• -7.58% YTD
• TREND = DOWN. XLY is actually trading slightly above the 10-week moving average which makes it a rising trend on an intermediate time frame. However, it's still trading below the 40-week moving average which was a point of resistance in April. Consumer Discretionary typically underperforms during weak economic environments, so I have no reason the trend will reverse anytime soon.

Technology (XLK)

• -19.28% YTD
• TREND = DOWN. Technology stocks had a powerful run from mid-2006 to the end of 2007. XLK turned bearish at the beginning of the this year, and the trend failed to reverse when the 10-week moving average failed to cross above the 40-week moving average this summer.
  

Health Care (XLV)

• -9.32% YTD
• TREND = NEUTRAL, BUT TURNING BEARISH. XLV fell below the 40-week moving average just today. Health care stocks were leaders of the market in July and August, but have struggled more recently. In fact, it seems that XLV turned down right after my previous post highlighting the strength of the sector. Perhaps some of the political risk is now weighing on the group as we approach November. This sector should be watched closely over the next few days to see if the trend is truly reversing, or if the 40-week moving average will act as support.

Materials (XLB)

• -10.84% YTD
• TREND = DOWN. Materials stocks turned down this summer after a powerful bull market that began in late 2005.

Industrials (XLI)

• -13.76% YTD
• TREND = DOWN.

Consumer Staples (XLP)

• -2.57% YTD
• TREND = UP. Consumer Staples stocks have shown resilience as they have provided the best return relative to other sectors for the year. This is to be expected during recessionary times or periods where the economy has slowed. A quick review of the top 10 holdings of XLP (see table below) provides a good explanation for the relative strength of this sector: Even during an economic slowdown consumers will still buy deodorant (thankfully!), shampoo, toothpaste, razors, coffee, food, cigarettes, soft drinks, pharmaceutical products, beer, and snacks.

Telecom (TTH)

• -23.62% YTD
• TREND = DOWN.

Utilities (XLU)

• -14.6% YTD
• TREND = DOWN.

THE UPSHOT: The US stock market has offered no where to hide this year as every sector has negative year-to-date returns. The only sector where we can identify an UP trend is in Consumer Staples (XLP). Health Care (XLV) is now on WATCH as it was recently in an UP trend but now appears that it is turning DOWN. I believe that there is always a bull market somewhere! The first half of this year, the bull market was in oil, commodities, and precious metals. In July and August the bull market was in health care. This year the bull market has been in short or inverse ETFs. Sometimes the bull market is cash. Cash is king during environments like this where money is rotating between sectors and asset classes. New trends are forming and somewhere ahead we will identify some amazing new bull markets. Cash will enable you to jump on these new trends very quickly once the transition is complete.

[DISCLOSURE: Some clients of Freedom Financial Solutions, LLC and/or Adam Zuercher's family accounts own shares of XLV and XLP.]

Healing an Ailing Stock Market

Over the last 3 months health care stocks have offered a cure for the sick stock market. The chart below (courtesy of FINVIZ.com) shows that the health care sector has been the only sector to offer positive returns for the past 3 months.

The next chart compares the Health Care SPDR (XLV) with the S&P 500 SPDR (SPY) over the last 3 months.

The health care sector has clearly outperformed the broad market with a positive return for XLV of 4.3% versus a negative return for SPY of -8.3%. In other words, the health care sector ETF has outperformed the S&P 500 ETF by 12.6% over the last 3 months.

As I like to say, "There's always a bull market somewhere!" These days, it has admittedly been a challenge to find an abundance of bullish trends as the market has been rather choppy lately.

Take another look at the chart above. You will see that most of the gains in health care have been generated since late July. Let's take a look at a 1-year weekly chart of XLV:

• As indicated by the blue trend line, XLV started rising in July. The price crossed both the 10-week and the 40-week moving averages by early August.


• The volume has been strong. We saw price increases on rising volume in four out of the last nine weeks. Seven out of nine weeks were positive, and the two weeks with price declines have shown volume lower than the previous weeks. All of this points to a rising trend with healthy volume.

Now take a look at the daily chart for XLV:

• This week we have seen some selling on higher than average volume. The price has pulled back a little bit, but remains above both the 50-day and 200-day moving averages.
  

THE UPSHOT: Health care is in the beginning stages of a bull market. Is the the trend sustainable? Will it continue? Trend followers always take the position that a trend is your friend until proven otherwise. In other words, I don't know what the future will bring. However, I can identify trends that are present today. Since trends always last longer than you think, you should operate on the assumption that a trend will continue until proven otherwise. You must look for bullish indicators and signs that the trend will continue. Be cautious when you see signs that a trend might be close to reversing. The key going forward for the health care ETF (XLV) will be the July trend line and the 40-week moving average. Today it is testing it's July trend line as well as the 40-week moving average. Look for the 40-week moving average to act as support for this trend to continue. If the price bounces off the trend line and the 40-week moving average this would be another sign of a bullish trend with the potential to be sustainable.

[DISCLOSURE: Some clients of Freedom Financial Solutions, LLC and/or Adam Zuercher's family accounts own shares of XLV.]