A Look Around the Market

It was a modest week for the market and we had no changes to our Portfolio, but there are some interesting things going on under the radar.

Is Consumer Discretionary about to make a comeback?

A major talking point for the bearish case of the market has been the relative weakness of Consumer Discretionary stocks (XLY). Typically in a strong, healthy market, the Consumer Discretionary sector tends to be a relative leader signalling a strong economy. When they lag it says that consumers are buying less and therefore the economic activity is slowing...The market HATES slowing! 

We have seen the XLY lag for the better part of 2014, but is all lost? Can it not turn around and rotate back into a leading group? Many of the key sector stocks have pulled back nicely from their highs and have built solid support bases to extend another leg higher. If the market is to extend its rally, Discretionary stocks are going to need to participate. 

Just taking a quick glance at the leading XLY sector stocks will show some very bullish activity. It appears that XLY wishes to participate here and may have a nice move coming. 

XLY 

XLY has been consolidating the big gains of last year by trading sideways through time. Remember prices can correct two ways, through lower prices or time. The most bullish scenario is when an price trades sideways after a big rally. This shows tight supply of stock at all time highs; it means current holders don't wish to sell and new buyers have to pay higher prices if they want in. That eventually causes a resumption of the prevailing trend. A weekly close above $67.40 would signal that the Discretionary sector is ready to continue higher. 

We are already seeing this breakout action in many of the top XLY stocks. When you see individual names start to lead the breakout, there is a very high probability that the broader group will follow. What you want to do is pick out the names leading the breakout and focus on them. Lets take a look at a few names I think are set up strongly for another move higher. 

Starbucks (SBUX)

This looks like a solid 5-wave sequence and it would seem that price has just completed wave-4 with this week's higher high. The 5th wave tends to be the most violent wave; you can make a lot of money in the last 3rd of a bull market. We could be looking at that right here. 

Zooming in on the recent rally and correction it appeared that price was playing out a long-term bearish head and shoulder top formation. Starbucks' stock broke below its support neckline in early April but saw no further downside follow through. That creates a false breakdown and traps all the short sellers as price rallied back above the support level. There are likely a lot of people caught out of position here as they were sidelined or betting on this "top" forming event. The breakout this week above the right shoulder high almost completely kills the pattern's odds of success. From false moves come fast ones in the opposite direction. 

Not only has the market fooled the over-aggressive in this space, but a new buy signal has also triggered. We can see that the 20 WMA has stopped declining and turned higher this week, thats sign #1. We also saw price take out the prior swing high in the downtrend and was confirmed by a Relative Strength breakout, showing money is rotating into SBUX. 

I would expect an increased probability of higher prices in the future, but in case this doesn't go to plan and the breakout here were to fail, I would exit positions below the $70 level as that would suggest more consolidation was needed. Above $70 and especially above $77, I like SBUX's chances going forward. 

Walt Disney (DIS) 

Shares of Disney are trading at new all time highs on strong trading volume again this week. When looking for a hint as to whether a sector can breakout to new highs, its a good idea to see how many underlying stocks are themselves making new highs. Seeing Disney lead here is a good sign for Discretionary stocks moving forward. 

There are more examples to be seen in the Discretionary space: our Portfolio recently took a new buy signal in shares of Ford, Comcast looks to be moving above its new support base, both TWX and FOXA are trading at the upper end of their ranges and are probing multi-year highs. The list goes on. 

I looks to me like the Discretionary space wants to push higher from here and I want to be positioned in the strongest names in the group. The risk/reward appears favorable after the recent consolidation and this could be an interesting rotating sector in the coming quarter or more. 

After a super rally, Energy stocks are extended

With all the news out of Iraq, oil prices have been rising, carrying many leading oil/gas stocks along with it. Some of the markets best year-to-date leaders have been energy stocks, stocks like EOG, SLB, COP. These names and many others are showing signals of intermediate "blow-off" surges. While long-term I feel the Energy sector is on strong footing, at this moment it is likely not favorable to be a buyer. 

EOG Resources  

EOG is one of my personal favorites in terms of price performance and its easy to see why. For a couple years now EOG has moved significantly higher, but has recently seen an escalation in its uptrend slope that appears unsustainable in the short term. Once price goes vertical the stability of the trend degrades and volatility usually expands, creating more risk. I think a pullback to at least $103-$96 is in this stock's near future. 

Schlumberger (SLB)  

Just like EOG, SLB has been a strong performer for the last year and has recently made a parabolic move to the upside. Again, long-term I love this space, but short-term warning bells are ringing. 

Conoco (COP) 

The move in Conoco has been unreal. 17 of the last 19 weeks have been positive, the stock has literally gone straight up 5 months in a row. While that is incredible price action, moves like that will need to correct at some point. The problem with trying to buy a stock like this is you have no idea where you are wrong. There is simply zero support for at least 15% below current prices. In my experience a move like this is not sustainable for too long. Be patient here.   

Utilities have bases for days!

Boring old Utilities look like one of the best long-term sectors in terms of value and price action in the market currently. There are base breakouts taking place that could present some serious long-term opportunity for portfolios. 

Stocks like American Electric Power (AEP), PPL Corp (PPL) and PG&E Corp (PCG) are showing very interesting support base formations and could be poised for multi-year runs. 

AEP

Readers here know how much I like AEP, it is currently one of the Portfolio's largest holdings. While I would expect some consolidation in the near future, you have to be pleased with the follow through above the all time highs resistance going back almost 20 years. 

PPL

PPL has always been on my radar, likely due to its relatively cheap valuation and high dividend yield (currently 4.3%). While it has seemed moderately appealing I did want more out of the stock in terms of higher highs and finally it seems we are seeing them. The recent breakout suggests prices want to move significantly higher from here. 

PG&E Corp (PCG)

Coiling at all time highs, PCG has the look of a stock that will resolve to the upside. After the monster rally from 2003-2007 prices have churned in a roughly $10 range. A breakout above the triangle resistance would set up a nice long-term position entry. While looking solid here, the 3.8% dividend payout is not too shabby either.


There are some interestings things going on out there that many are not talking about. If you listen to the media you will hear that Discretionary is dead, Energy is a strong buy and don't even think they will waste air time discussing Utilities. I have found listening to the financial media creates more contrarian ideas than anything else. If CNBC says something is a strong buy, the move is likely already over. If they leave a sector for dead it often means its just getting ready to rally. Its almost uncanny how bad they are at making investment advice. But if you use your eyes its pretty easy to see where the value is in the markets. Just observe the price action and that will lead you to the right conclusions.

Chart of the Week 

3D Systems (DDD)

We've been watching DDD for several weeks now as it has been likely trying to put in a bottom of some kind. It has traded sideways for 12 weeks and prices have begun to turn back higher. This week DDD broke back above its 20 WMA, however the average is still currently declining. We want to see the 20 WMA turn higher as prices continue to make higher lows. Stops for aggressive long positions here should now be at trend support and the lows at ~$50. A break below $50 would make a new low and we would want to see that area hold on any sort of test. Above that level I think DDD looks pretty interesting.