Four Industry Groups You Should Still Avoid

by Tom Aspray

It was another good day for the stock market as even the downward revision of the first quarter GDP did not stem the buying. The rally has taken the major averages back to the start of stronger resistance.

The futures are higher again in early trading Thursday, and the S&P futures are now back above the 1600 level with further resistance in the 1608-1615 area. The daily technical studies have also rebounded back to resistance but do not yet show signs that the correction is over.

The McClellan oscillator has risen to -48 from its recent low of -276 and does show a pattern of higher lows. A strong move above the zero line would be an encouraging sign. The volume and A/D line analysis both need more work before they could turn positive.

The Spyder Trust (SPY) is now down just over 2% for the month but is still up 12.4% for the year so the double-digit gains for the year are still intact. It has been a much better month for some industry groups while others are acting much weaker that the S&P 500 or the SPY.

These four industry groups are among the weakest in June but are they showing any signs that they are ready to bottom?

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Chart Analysis: The Dow Jones Coal Index (DJUSCL) traded as high as 184.83 last October but is currently trading down over 45% from those highs.

• The break of support, line a, in May signaled that the downtrend had resumed.
• DJUSCL lost 3.75% on Wednesday and is now down over 25% for the month.
• President Obama’s comments about carbon emissions hammered an already-weak market this week.
• The relative performance shows a longer-term downtrend and broke support (line b) in the first week of June.
• The break of support was also confirmed by the OBV as it dropped the three-month support, line c, in early June.
• The index is trading at the daily starc - band, and next week, the band will be at 100.20.
• There is first resistance now in the 110-112 area.

The Dow Jones US Home Construction Index (DJUSHB) has also had a rough month. It is down over 10% this month as the fear of higher mortgage rates has cancelled out the bullish news on the housing sector.

• The chart shows that the lower trend line support (line d) and starc- band were hit early this week.
• As noted in a recent Trading Lesson, “if the support in the 440-446 area is broken, then the major 38.2% Fibonacci retracement support is at 405.”
• The daily relative performance dropped below its WMA on May 20 indicating it was acting weaker than the S&P 500.
• The DJUSHB is down 16.8% since May 29, but many of the homebuilding stocks have done even worse.
• The daily OBV dropped below two-month support last week, line f, as the volume was quite heavy.
• There is initial resistance at 463 with the declining 20-day EMA at 479.

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It should not be a surprise that anything to do with mining or the metals has had a rough month. The Dow Jones US Platinum & Precious Metals Index (DJUSPT) is down 21.3% this month.

• The daily chart shows a series of continuation patterns within the longer-term downtrend, line a.
• The uptrend from the November lows (dashed line) was broken in February as it declined from 87.50 to 54.50.
• The rebound from the April lows was broken during the first week of June (see arrow) as the April lows have now been broken.
• The lower support, line b, is at 45, which is about 14% below Wednesday’s close.
• The rally in the relative performance in late May and early June failed below the downtrend as the WMA was violated when support was broken.
• As the rebound was topping in late May, the OBV just barely moved above its WMA.
• The OBV has plunged in June and is well below its WMA
• The declining 20-day EMA is now in the 60 area.

Another very weak industry group has been the Dow Jones Mortgage Finance Index (DJUSMF) as it is down over 10%. This was matched by the sharp decline in the REIT market, which was hit hard over fears of early Fed action.

• The uptrend from the November and March lows, line f, has been broken though DJUSMF rebounded Wednesday.
• There is initial resistance at 5.23 and the May lows.
• The relative performance dropped below its WMA on June 14 and has dropped below support at line g.
• The on-balance volume (OBV) was strong going into the early June highs before it collapsed.
• The break through the OBV uptrend, line h, was another sign of weakness.
• The severity of the decline indicates it will take some time before a bottom could be formed.

What it Means: In addition to these four industry groups, the mining, basic resource, and gold mining stocks are also showing double-digit losses.

The relative performance analysis for all, except the home construction index, has been weak for most of the year. Multiple time frame RS analysis can be a valuable tool for determining what sectors to invest in, as well as which ones to avoid.

As I noted yesterday, the RS analysis of the regional banking sector makes it attractive for new buying.

How to Profit. I think the correction in the Dow Jones US Home Construction Index (DJUSHB) will provide a long-term buying opportunity, but there are no signs yet that the index or any of the homebuilding stocks have bottomed. All of the other indexes should still be avoided as well.

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