The Dollar has been poised for a breakout for some time. The PMO has been rising nicely, but UUP has been banging its head on overhead resistance with not much success. Looking at the big picture, relative strength has been shuffling toward defensive sectors like Consumer Staples and Utilities which should make investors uneasy.
Since forming the double-bottom back in January/February, I've been bullish on the Dollar but it has struggled. In fact, the double-bottom pattern was scrubbed when the final breakout in March didn't take. Price has been pounding on overhead resistance with no luck. The PMO signal comes at a good time, but my bullishness is tempered given UUP has still not punctured overhead resistance. It closed on its high today which is very encouraging. The PMO BUY signal is coming below the zero line so there is plenty of room for positive momentum to build before we start seeing overbought readings.
During the taping of today's MarketWatchers LIVE show, I noticed that the sector rotation picture is troubling in the short term. Below is a six-month performance table. Note the very high SCTRs, but in particular notice that the well-known aggressive sectors have been leading the charge. Intuitively we know that technology has been sustaining much of the previous bull market moves. However, tech stocks are getting hit very hard.
Notice when we move to a one-month timeframe, the defensive groups are leading. If you look at the one-week version you'll see the same thing. At this point, we are seeing more leaving the aggressive sectors. If we begin to see 'green' bars or positive percent changes on Energy, Staples and Health Care, we should definitely worry. Sector rotation principles tell us that when these sectors begin to lead or are leading, it can fuel a bear market.
Visually, you can look on a daily RRG chart and the strong rotation into the Improving or Leading category by XLU, XLE, XLI and XLP. Staples are improving and Discretionary, despite being in the leading category, is moving south to southwest which is bearish.
At this point, the defensive areas are "leading" the market in the short term. However, they are leading mainly by not being the biggest losers in this correction (with the exception of Utilities). If we start to see these sectors gaining more than just momentum, this is more likely a bear market not just a correction.
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