Ralph Acampora - Technical Analysis Market Letter, June 2013
An article by New York Institute of Finance instructor Ralph Acampora.
I ended my first market letter last month with a promise to update you on any new leadership that might emerge between publications. Well, without sounding too dramatic, I have tons to share with you all regarding what I consider very significant shifts in sector rotation.
Probably the best way to summarize what happened last month is to coin a new phrase: "Sell in May and go into cyclicals". From the outset, the Dow Jones Utility Average began rolling over while the following S&P Sectors: Financial, Industrial, Energy, Material and Technology accelerated to the upside , gaining: 10%, 9.2%, 9%, 7.6% and 5.9% respectively. However, this change from defensive to riskier assets was short lived; on May 22nd the world literally started panicking over whether the FED Chairman, Ben Bernanke, would soon end the stimulus program by 'tapering' bond-buying! As a result, all of the leading market indexes formed classic "Key Reversal-Day" patterns by the end of that session - this configuration normally terminates the prior advance and ushers in a new correction. And, that is exactly what happened - the S&P 500 lost a quick 5.21% during the following ten trading days!
An old Wall Street adage: "During a market sell-off/correction, the sectors that go down the least and/or suffer minimal technical damage are the new leaders". Between May 22nd and June 6th, the best performing sectors relative to the -5.2% decline in the S&P 500 were: Technology (XLK) down a mere -3.71% and Industrial (XLI) off only -4.8%. The two worst performers were Telecommunication (IYZ) -6.66% and Utility (XLU) - 10.23% Then, on Friday, June 7th the market experienced its second best up day this year as most indexes and 9 out of 10 S&P Sectors bounced up from their respective 50-day moving averages (MA). This sudden reversal was complemented by S&Ps revision of its US credit rating from 'negative' to 'stabile'. However, this "feel good" sentiment was dashed when fears rose that Central Bankers were dampening their commitment to money pumping - the US Dollar weakened, commodities fell, interest rates rose and emerging markets made new lows! Markets around the world all tumbled, triggering seven out of the past eleven sessions suffering triple-digit intraday swings on the DJIA! Unfortunately, this erratic activity, froth with failed rallies, portends the continuation and not the end of this market's correction. Any subsequent break downs below 50-day MA's. will trigger moves to their 200 day MA's, or another decline of approximately 5%. I believe that we could experience corrections similar to the May to June, 2012 -9.7% and October to November, 2012 -8.7% periods. Like these two sell-offs, this correction is long overdue and very important in identifying new leaders - it is during corrections that 'rolling rotation' between sectors will emerge and give further life to this secular bull market that commenced in March 2009.
What will it take to end this correction? The official answer lies within the oldest theory in technical analysis, the Dow Theory. Charles Henry Dow was profound in his simplicity; he wrote and preached that the producers of products (DJ Industrial Average) and the shippers of these products (DJ Transportation Average) were mutually interdependent parts of the economy; thus, when one average makes a new closing high, it must be confirmed by the other. When they divert (one average not making a new closing high while the other is doing so), that is the beginning of a secondary correction. On May 28, 2013 the DJ Industrial registered a closing high of 15,409.39; however, the DJ Transports failed to do the same, it peaked on May 17, 2013 at 6,549.16. Hence, during the latter part of May and into early June, Dow Theory was in secondary corrective mode. Stay tuned!
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