Two Sectors Show a Breakdown — Sector Rotation or Correction?

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Expectations were high that the Federal Reserve’s minutes from their September meeting would give us more information about a hike in rates, but there were few new insights regarding even a time frame.

According to the release, there was a clash among voting Fed members over the timing for such a move. Before the meeting, and for weeks, some of the FOMC members projected that December was a target, but there was no support for a date in the latest release, and some, outside the Fed, now believe that December is “off the table,” according to The Wall Street Journal.

Despite the lack of real news from the Fed, long-term rates rose yesterday. And the following sectors of the S&P 500 had gains: Real estate rose 1.3%, utilities gained 1.0%, telecom gained 0.6%, and consumer staples rose 0.5%. Three sectors closed in negative territory: Healthcare, energy, and materials fell between 0.6% and 0.2%.

Crude oil fell 1.2% to $50.18 per barrel and dipped below $50, a low for the day.

At the close, the Dow Jones Industrial Average gained 16 points at 18,144, the S&P 500 added 2 points to close at 2,139, the Nasdaq fell 8 to 5,239, and the Russell 2000 broke even at 1,227. The NYSE’s primary exchange traded 834 million shares with total volume of 3 billion shares, and Nasdaq crossed 1.8 billion shares. On the Big Board, advancers led by a slight margin, while on Nasdaq it was decliners that led by a small amount. Blocks on the NYSE increased to 5,233 vs. 4,166 on Tuesday.

S&P Health Care SPDR XLV breaks down
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S&P Homebuilders ETF (XHB) breaks spt
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In a bull market, it is unusual for stocks and sectors of the indices to move at the same time, in identical directions. But sectors or even individual stocks can begin a trend. Here we see two important sectors, represented by their respective exchange-traded funds, breaking support.

First the Health Care SPDR (NYSEARCA:XLV) is shown falling through its major bullish support line at $72 and yesterday closing below its 200-day moving average. The same chart action is observed by the SPDR S&P Homebuilders (ETF) (NYSEARCA:XHB), first breaking its 50-day moving average, then a major support line, and finally, on Tuesday closing under its 200-day moving average.

Conclusion: Two major sectors have broken down and another, the Retail sector, is close to a break. Is this the first in a series of warnings that a correction is upon us, or is it just sector rotation? I believe it to be sector rotation, but belief and hard evidence are very different.

However, if the Retail sector breaks and is followed by three other sectors, over 50% of the S&P eleven sectors will have broken, and that would cause a red flag to fly.

Countering this, the Dow Transports have been strong. As an economic indicator, they may be telling us that earnings are to be higher than expected. It is telling us that the bull market is still in force, thus we should continue to buy into weakness with the cautious expectation of better earnings ahead.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.


Article printed from InvestorPlace Media, https://investorplace.com/2016/10/correction-sectors-breakdown/.

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