3 charts that can tell you where to put your money
Because oil (Crude Oil
Continuous) and the Reuters/Jeffries CRB Index has started to weaken,
the dollar has started to strengthen, and the yield curve has inverted, I think
I need to examine whether or not the economy is moving out of its’ late
expansion phase and into its’ early contraction phase. Without getting too
fundamental, the strongest sectors in the late expansion phase of the economy
are those related to energy.
We know that energy, including the oil, oil
service, gas utility, and electric utility sectors have been the strongest
sectors performance wise for the last couple of years (at least) without doing
too much research. However, in January, crude oil ($WTIC) made a double top, as
it was unable to move to $70/barrel. After its’ failure at that level, the
commodity has sunk and now is trading right around its’ 200-day simple moving
average.
In addition, the Reuters/Jeffries CRB Index, ($CCI)
has fallen below its 50-day simple moving average and now trades right near it.
We know that commodities and energy have pulled back in price during February.
But, has this been a normal pullback in a strong up-trend, or, something more?
In the interest of clarity, and for the time being, I am going to take the
rising dollar and the inverted yield curve out of my analysis.
The sectors that are generally the strongest in an early contraction phase are
those related to consumer staples. Often termed “defensiveâ€, healthcare and
sometimes drugs can be included in those sectors that do well in early
contractions. In order to determine whether or not we are moving out of late
expansion, I am going to look at a relative strength chart of the Morgan Stanley
Oil Services Index
(
MGO |
Quote |
Chart |
News |
PowerRating) versus the Morgan Stanley Consumer Index (CMR),
and, also Morgan Stanley Commodity Index (CRX) versus CMR. To take the analysis
further, you could also do a relative strength study of MGO and CRX versus a
healthcare and/or drug index of your choosing. Below are the current Point and
Figure trend charts of MGO, CRX, and CMR.
As expected, both MGO and CRX have fallen in price during the recent volatility.
CMR did pull back slightly this month, but was able to hold above its’ support
line, and did not break a previous level of support. I assume that all readers
of this article are familiar with the concept of relative strength so I will not
go into that here. Just know that if an entity has a rising relative strength
chart versus another entity then that is good (rising prices likely) for the
first entity and bad (falling prices likely) for the second. Unfortunately, I
will not be able to share with you the relative strength charts. You will just
have to take my word for it.
When calculated using the dollar change in price,
both MGO and CRX have started to under-perform (the chart is falling) CMR.
However, what I view as a longer-term measure, when calculated using the actual
% change in price, the relative strength of both MGO and CRX is still stronger
(the chart is rising) than the relative strength of CMR. Something else to keep
in mind is the fact that both CRX and MGO are outperforming the S&P Equal
Weighted Index (the “market†as a whole) on both the short-term and long-term
measures of relative strength whereas CMR is under-performing.
To look this up yourself, you could use
(
RSP |
Quote |
Chart |
News |
PowerRating)
(Rydex ETF S&P Equal Weighted) as a proxy for the S&P Equal Weighted Index. My
personal conclusion from this information is that the recent volatility that we
have seen in the commodity type stocks and indexes is just a normal pullback in
a strong up-trend. Until there is further deterioration in price and the
relative properties of the cyclicals start to erode, then they will continue to
outperform and you could make the case that we are still in the late expansion
phase of the economic cycle. Either oil and commodities will need to decline
more, or cyclicals need to show more strength in order for it to look like we
are moving into early contraction.
Sara Conway is a
registered representative at a well-known national firm. Her duties
involve managing money for affluent individuals on a discretionary basis.
Currently, she manages about $150 million using various tools of technical
analysis. Mrs. Conway is pursuing her Chartered Market Technician (CMT)
designation and is in the final leg of that pursuit. She uses the Point and
Figure Method as the basis for most of her investment and trading decisions, and
invests based on mostly intermediate and long-term trends. Mrs. Conway
graduated magna cum laude from East Carolina University with a BSBA in finance.