Business and Financial Guido's Weekly Market Notes: Consumer Stocks Show Strongest Relative Strength

Posted Friday, August 28, 2015 12:00 am

Bruce A. Bittles

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The popular averages posted modest gains last week, exhibiting remarkable resiliency in a less than friendly environment. China’s surprise devaluation and another downgrade of S&P 500 earnings for 2015 caused stocks to spiral down toward technical support. Despite the increase in intraday volatility, stocks remain locked in a trading range that has prevailed for nearly 10-months.

Excessive valuations, a weak seasonal period just ahead and poor market breadth have harnessed upside progress. The downside has been limited by excessive short-term investor pessimism and modest economic growth that has allowed bond yields and inflation pressures to remain low. Near-term, it is anticipated that progress will continue to be limited as we move deeper into the third quarter. Investors should focus on consumer stocks that are at the top of the relative strength rankings.

The consumer discretionary and consumer staples sectors are benefiting from improvements in the labor market, the plunge in gasoline and heating oil prices and more recently by the devaluation of the Chinese yuan that will result in lower prices for consumer goods. It is estimated that 20% of U.S. imports come from China.

The next meeting of the Federal Reserve Board is scheduled for September 16 and 17. China’s devaluation will add another dimension to Yellen’s decision on raising interest rates. It is doubtful, however, that the shift in China’s monetary policy will cause the Fed to pause.
The latest data on the U.S. labor market and retail sales in addition to surging prices for rents, home prices and commercial real estate could trump the jump in volatility in the world currency markets. Given that next year’s election is going to be highly contested, the Fed likely foresees 2015 as the best opportunity to normalize interest rates without appearing political.

The weight of the technical data is mixed but recent investor sentiment data argue for more rally attempts near term. The Chicago Board of Options Exchange (CBOE) shows a large ongoing demand for put options (puts are bought in anticipation of a market decline). Using contrary opinion, this would suggest another attempt by the S&P 500 to move pass the immediate hurtle at 2100 using the S&P 500. The Ned Davis Daily Trading Sentiment Composite also suggests pessimism has moved to an extreme.

The percentage of groups within the S&P 500 that are in defined uptrends slipped to just 54% last week from 57% the previous week. Should the percentage of groups in uptrends fall below 50% it would turn the Tape negative and suggest a deeper correction is underway. Support is considered to be 2040 using the S&P 500 with resistance at 2135.