SPECIAL REPORT

SECULAR BULL MARKET? WHENCE THE LEADERSHIP?

 
September 3, 2013

Have stocks entered a new secular bull market or have we enjoyed nothing more than a “fake-out breakout” designed to suck in retail investors at the top before stocks cascade down again as they did in 2001 and 2007?

Are you prepared? Do you know what to look for? We can help.
 
In April 2013 the S&P 500 (SPX) broke out a new all-time high above  1576 and then rallied to the 1700 area.  That breakout asserted that we are in a new secular bull market.
 
Is that assertion true? Or, put differently, for our purposes, “Is the breakout durable?”  That’s the question the stock market is now asking.  How solidly is “the new bull” confirmed? 
 

 
In the days and weeks ahead the stock market will be testing the breakout over those 2007 highs.  How the market responds to this test may tell the tale of the best ways to invest over the next 15-20 years!  Your financial future may hinge on whether you are able to answer those questions based on the best information…or not.
 

 
Let’s look at the 9 SPX Sector Exchange Traded Funds (ETFs) to see what each of their charts is saying.  The first three charts are “screaming,” “Secular Bull!”  But the messages we get from a number of the other charts are less exuberant and/or may ask some questions more than they give answers.

XLV( Health Care). Broke out to new all-time highs in 2012.  Secular bull market; above both the ’00 and ’07 highs. Intact uptrend with no deterioration of momentum.

 

May be due for a correction. But that’s a secular bull chart.
 
XLY (Consumer Discretionary). Broke out to new all-time highs in 2012.  Secular bull market; above both the ’00 and ’07 highs. Intact uptrend with no deterioration of momentum.
 


May be due for a correction. But that’s a secular bull chart.

XLP (Consumer Staples) Broke out to new all-time highs in 2012.  Secular bull market; above both the ’00 and ’07 highs. Intact uptrend with no deterioration of momentum.



May be due for a correction. But that’s a secular bull chart.

XLI (Industrials). Broke out to new all-time highs in 2013. The breakout, like the SPX’s, is not huge. It would not take a large move to cause a failure.  That said, the uptrend off the ’09 low is intact, shows no important negative divergences, and is not in imminent danger of failing.



XLU (Utilities). Above the ’00 high but below the ’07 high. So, no secular bull market here.  The uptrend off the ’09 low is intact but is being threatened. The backup in risk-free Treasury yields has hurt the prices of high-yielding stocks, especially Utilities.  We are NOT getting confirmation of a secular bull market from this sector.



XLE (Energy). Above the ’00 high but below the ’07 high. So there’s no confirmation of the SPX breakout here. Because this ETF corrected about 50% in ’08 we probably do not want to call this a secular bull market in Energy stocks. A breakout above the $91.50 area on this chart would support the secular bull case.



XLB (Materials). Very similar to XLE above. We’ve regained most of the losses from ’08 but not all. We do not have a secular bull market on this chart at this time.



XLK (Information Technology). Flirted with breaking out to new multi-year highs in 2012 (above the ’07 high).  Has confirmed that breakout in 2013.  But remains at roughly only half the price level that it was in 2000. We’re clearly in a cyclical bull market, but we’re not out from under the shadow of the ’00 highs. There’s room to run to the upside as Tech is cheap now. But the Tech Bubble of the ‘90s has not been cleared out of our collective memory.




XLF (Financials)
While the Financials have been outperforming the SPX in 2013, they have retraced less than half of their losses suffered in ’08-’09.  The cyclical bull market off the ’09 low is intact. But we are not getting confirmation of a secular bull from this sector.

To summarize what we have learned from examining the SPX Sector ETF charts:  Health Care, Consumer Staples, and Consumer Discretionary stocks are in clear secular bull markets that support that secular bull thesis for the SPX.
 
Industrial Stocks have broken out and are giving early signs of confirming the SPX breakout over its 2007 high.
 
Utilities, Energy, and Materials stocks have gained back most of their losses from the ’07-’09 bear market but have not confirmed the SPX breakout.
 
Information Technology stocks have rallied through their ’07 high but remain well below their ’00 highs.  The cyclical bull is intact for Tech (off the ’09 low).  But they remain in the shadow of the Tech Bubble that burst in ’01.
 
Financials are in a cyclical bull market, but have regained less than half of their losses from ’07-’09.
 
In short, 1/3 of the SPX sectors are screaming “bull market.”  One sector is joining in that chorus but at a less committed volume.  One-third are approaching their highs but have not broken out.  And 2 sectors are still wallowing in the messes left by the Tech and Financial bubbles.
 
Are there reasons to be encouraged by some of these charts? Absolutely.  But this stock market has by no means confirmed its launch into the new secular bull market that some are proclaiming is “game on.”  And in the years ahead it will be crucial to track which parts of the market are doing well and which are lagging.
 
Consumer Discretionary stocks have been outperforming the broad market since 2009.  Energy stocks showed great leadership from 2004-2008.  SmallCaps have shown strong leadership this year.  MidCaps beat the market from ’09 into ’11, but lately…not so much.
 
Where and how will you invest and trade?  Will you be able to secure your financial future?
 
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In the weeks ahead, in these Special Reports we will examine:
·         The Dow Jones Industrial Average (which is retreating from an important target generated in ’06 and that was tagged earlier this year).
·         The Dow Transportation Average and whether Dow Theory is sending  bullish or bearish signals.
·         The Philly Semiconductor Index and what it’s saying about Tech.
·         The Chinese and Japanese stock markets and what they are telling us about global economic growth.
·         European stock markets and what they are saying about Europe’s prospects for emerging from a recession.
·         The SPX’s behavior in the years prior to the inception of the great Bull Market of 1982-2000.
·         What’s happening to your bond portfolio and how you can profit from a rising-interest-rate environment?
 
If you would like a free 2-week subscription to The Agile Trader, click here!
 
 
Best regards and good trading!
 
The Editorial Staff
The Agile Trader