Assessing the broad market can be difficult, but it is one of the ways to manage risk from a trading perspective. Having an awareness for which sectors/industries are leading and/or lagging is a necessary component to trading. Right now I am seeing 3 key exchange-traded-funds (ETF’s) that are currently lagging.
If you have been following the market for the past few years, then you know that one of the stories is the current recovery in the housing market. Housing lead the way down from the 2007 highs to the March, 2009 lows. Data over the past year or so has continually improved and many of the homebuilding stocks have more than doubled in price. Below you can see a daily chart of the XHB—the SPDR S&P Homebuilders ETF. As mentioned, homebuilders have been leaders in the market, and it was arguably the trade in 2012. However, I am seeing some signs of concern. Notice the set of “lower-highs” (illustrated with the trendlines and arrows) made by the XHB. After a clear uptrend, is appears to be weakening and many of the homebuilding stocks have been slowing as well. This is certainly an area of concern because we do not want to see previous leaders become laggards. Pay attention to homebuilders.
Financials were the leading sector in 2012. However, they have also been lagging as of late. The XLF ETF is featured in the monthly chart (below) and you will notice the horizontal line drawn at a key point of support—the ~$17 area. This level is important dating all the way back to 2008 (and 2011 as well). We do not want to see bulls give up what should be an important point of support. Financials have definitely pulled back a bit this year and this is yet another concern. In a strong bull market, you want to see leadership from the banks. Keep a close eye on the XLF.
Finally, (perhaps one of the least talked about sectors/industries) there are the transports. I have touched on “Dow Theory” before and how the big transportation companies (i.e. FedEx, UPS, Union Pacific) need to be showing strength as the broad market trends higher. I have included two charts below—the first is on a daily timeframe and the second is on a monthly timeframe.
Notice in the daily chart that the IYT ETF (transportation ETF) is also making a set of “lower-highs” (illustrated with the trendlines and arrows), after making a run above $100.
The monthly chart looks back several years and highlights the sharp move above ~$100 earlier this year. This is yet another concern. Strength from transportation stocks is interpreted as a good sign for the economy (and business activity, in general) because the belief is that commercial activity is picking up when money is poured into airlines, railroads, and shipping companies. Make sure the IYT is on your radar.
Again, it is usually a cautious (but not necessarily an inherently bearish) sign when 3 previous leading sectors start to lag a bit. Put these ETFs on your radar and keep studying the broad market in order to position yourself for the best possible trading opportunities.