As the dust settles from the sell-off in mega cap technology (AAPL, MSFT) and food stocks (KO, MCD), I explore three strongly trending stocks in the Dow 30, and examine the Dow 30 internal technical condition. At the moment, the three best trending stocks are 3M, Johnson and Johnson and Travelers. The consolidation in the Dow which began in March has left technical weakness below the surface that must be repaired, or the index will turn lower again (see Chart 1). Despite this weakness, the breakout in the Dow 30 is holding well (see Chart 2).Chart 1: The proportion of stocks in the Dow 30 trending lower on an intermediate-term basis has increased steadily (during the consolidation since March, see chart below) and the risk of a cross-over is increasing. If and when the red-line crosses above the blue line, as it did last fall just before the election, we can conclude that the summer slow-down has arrived. The model uses a 20-day simple moving average and half-standard deviation wide, 100-day Bollinger bands to indicate the trend (see details here).
Chart 2: The breakout in the the Dow is holding, despite the sell-off in the mega-cap technology stocks. (See live chart here.)
MMM in Up-trend Channel
If the Dow is trending higher, then there must be stocks other than technology stocks carrying it higher. I searched the Dow30 and ranked the stocks using the Chande Trend Meter. The first stock to catch my eye was MMM, an industrials company known for product innovation (see Chart 3). Since its breakout in February, 3M has settled into an up-trending channel, with reasonably good support near the lower trend-line. 3M is near the top end of the channel, so it could move higher, as it did by hugging the upper trend-line in March. However, by definition, the risk is proportionately higher along the upper boundary of the channel. I checked the relative performance of MMM versus IYJ, the iShares US Industrials ETF, and it is clear that 3M relative strength versus other industrial stocks is improving (see Chart 4).
Chart 3: 3M broke out in February, relatively late in the post-election rally. Since then, it has set up an up-trending channel that serves as a useful template for judging entry opportunities. (See live chart here.)
Chart 4: 3M has been strengthening versus other industrials, a good omen for further price improvements. I used the iShares US Industrials ETF for reference. (See live chart here.)
JNJ Gains in Absolute and Relative Trend Strength
JNJ shows a breakout in early March, followed by a re-test, that came down to the November peaks. The next leg up broke through the March highs and has held the breakout through the turbulence of the past few days. Its CTM value is over 95, always a strong indicator of a breakout with good momentum (see Chart 5). JNJ is also strengthening versus the pharmaceuticals group, suggesting higher prices are likely (see Chart 6).
Chart 5: JNJ has followed a classic breakout-then-retest pattern as it makes its way higher. (See live chart here.)
Chart 6: JNJ has improved its relative performance versus the IHE iShares US Pharmaceuticals ETF. (See live chart here.)
Travelers Drifts Higher
The chart for Travelers looks a bit similar to the JNJ chart in that it has a series of breakouts and retests of prior support levels (see Chart 7). TRV has broken out with good momentum (high CTM at 96) but its relative strength versus its peers remained flat. Thus, it is moving along with its peers.
Chart 7: Travelers has broken out with good momentum (high CTM, see lower panel), but its relative strength has not accelerated versus its peer group. (See live chart here.)
Now that Apple, Microsoft, Coca Cola and McDonald's have declined from their recent highs, we can see which other stocks have held up well during the selling of the past few days: 3M, JNJ and Travelers stand out.
The Dow30 internal technical condition needs some additional repair work for the trends to accelerate. For example, the path of least resistance calculations show that the difference between the proportion trending higher (versus trending lower or flat) is quite small (see Chart 8).
Chart 8: I used four different trend-following models (see details here) to separate the thirty Dow Industrials Average stocks into two bins: trending higher, or not trending higher. The difference between the two proportions is quite small, suggesting that more technical repair work is needed after the four month consolidation in the index (see Chart 2 above). The time period increases from left to right, from 25 to 200 days, doubling at each step.
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