Douglas Busch

Industrial Strength Ahead? As defensive rotation continues in the markets with real estate, utilities, and healthcare the top three major S&P sectors over the last one-month period, the industrials are in hot pursuit rising almost 3%. Seasonality is interesting with the XLI as notice the first 6 months of the year average an UNCH return essentially, but the second half of the year brings in the volatility, but once Q3 is in the rearview mirror, Q4 shines. September is the outlier month in the last 4 years down almost 6% with ZERO months CLOSING above where they began. Looking internally one of the best subsectors within has been the railroads, which do question the recession ramblings. NSC has been acting the firmest and now sports a bull flag pattern, which started with a successful retest of a break above the downtrend. A break above the 245 pivot carries a measured move to 270 in the near term. Of course, on the flip side, CNI has fallen 15 of the last 20 weeks. Stock selection is crucial and XLI bulls want to see the daily chart of the ETF start to trade a bit tauter. But looking under the sector surface shows some emerging leaders.

Tasty Reaction: Earnings season is starting to wane as the summer wears on and of course, it is impossible to know what will happen when specific names report. Among the casual diners, one of the better-looking charts in the space is the one below of SG. The stock is up handsomely and obviously, this may not translate to the opening PRICE Friday morning or how it CLOSES on Friday but thus far as of 8pm EST it has been well received up more than 20%. Give it credit for holding near the prior double-bottom breakout from its prior earnings reaction on 5/10 that vaulted 34% (and the previous one jumped 24.8% on 3/1). Its WEEKLY chart for the last 4 weeks was retesting a bull flag breakout and the MONTHLY chart suggests this can have a run to the very round 50 number, a measured move of a break above 30 with the flag pole commencing at the 10 figure. Peer SHAK has been behaving well and recently posted its third straight positive earnings reaction with gains of 16.9, 1.6, and 26 on 8/1, 5/2, and 2/15 respectively. Its MONTHLY chart is sporting a cup with handle pattern with a breakout pivot of 111 to be bought.

Checking Under the Hood: In the consumer discretionary space there are several ways to gauge the overall temperature. First one could look at the ratio chart comparing the staples (XLP) to the XLY, and if we did that we could certainly see a "risk off" environment. The XLP has been outperforming and recently broke above a nice cup base pattern. Other ways include contrasting the broader XRT to the XLY, to see if it is just AMZN and TSLA pushing the latter ETF higher. Below we take a peek at yet another way with the chart of the equal weight consumer discretionary ETF in the RSPD. Its daily chart below shows the instrument sinking and its WEEKLY chart is looking at a 4 week losing streak starting with the bearish shooting star the week ending 7/19 which also retested the peak of a bearish three black crows pattern after the big run from the last October lows. We spoke about this recently being the only major S&P sector in the red on a YTD basis, and perhaps this alone could be a good indicator of recession as we know 2/3rds of GDP emanates from consumer spending. I am no economist but this group is struggling and the weakness is pervasive.

Next "Old Tech" Shoe to Drop?  Intel last week registered yet another dud of an earnings reaction with now its last 3 basically all producing double-digit losses. The stock is now a whopping 60% off its annual peak made at the very round 50 number last December. On its WEEKLY chart give it credit for doubling in PRICE in 2023, but this name is a fraction of its old self (it gave a brief thrill when it broke ABOVE a bear flag several weeks ago but it was shortlived). Round number theory is coming into play at the 20 figure but I would not touch this one with a 10 foot pole. Former Dow Jones "Industrials" peer CSCO could be the next to undergo a substantial negative trend change. The WEEKLY chart below shows the name nearing a bearish head and shoulder pivot. It is now in "bear market" mode more than 20% off its most recent 52-week highs and its daily chart here completed a 3 black crows pattern and this is now well below both a downward sloping 50 and 200-day SMA. These two names are dead weight on the Dow, but being such low PRICED stocks (VZ is the only other name in the PRICE weighted index to be a lower PRICED name) is not having a strong impact on the widely followed benchmark.