Sectors Showing Rotation to Defensive Stocks

Coming off another dismal jobs report investors look towards earnings to keep the move higher intact. Last week was all about the economic data for June and it wasn’t pretty. In fact, it confirmed most of our assumptions, the economy continues to weaken gradually. The ISM manufacturing data was the most telling as it showed contraction for the first time in three years. There were rumors late in the trading day on Friday the Fed was prepared to step in with more easing. The rumors pushed stocks off there lows, but the rumors are just that, for now. Any action by the Federal Reserve is only a temporary fix for what is lacking in the economy and it would rally stocks temporarily, but the longer term outlook doesn’t change.

With all that in mind how do we approach this week of trading? Cautiously and with a short term outlook. This remains a traders market plain and simple. there is nothing on the horizon that shows the ability to believe a longer term shift in growth is building. A look at the longer term charts shows the trendlines are being challenged on the downside as the weakness continues to build. If these trends break they will add more pressure on the downside for stocks. Thus, the reason for a cautious approach to the markets this week.

Scanning the sectors we find the charts in decent shape, but sitting on or near short term support. Starting with the broad market indexes the S&P 500 index closed back in the middle of the previous trading range after falling back below 1363 support. 1332 is the level to hold next, and then 1309 and the 200 day moving average. It will depend on how the earnings season kicks off if we hold support.

The leaders, as you would expect, are more on the defensive side. Healthcare is testing support at 394 on the Dow Jones US Healthcare Index, and if it holds could offer opportunities in the sector. With the resolution to the healthcare bill the sector remains one of the leaders. Watch for the test to hold support and offer some entry points. Scanning the drug (XPH) stocks shows the leaders are obvious along with the biotech (IBB) sector. Watch for XLV to hold $37.30 support as a short term opportunity. $58.50 for XPH is support in the current move.

Basic materials (XLB) are holding up surprisingly well. $34.85 is the support level to watch short term. LPX, MAS and CX are some of the leaders in the sector to watch for an indication on the pullback test. Metals had moved nicely off the lows, but have retraced on the gains. However, FCX and STLD held up well and are showing some signs of holding support short term. Industrials (XLI) held support as well with the sector holding the uptrend off the June low. This is an eclectic group of leaders currently, but we have to take what the market gives.

There are some big name stocks that remain in good shape as well. Apple (AAPL) moved higher from the six week trading range and held the gains. AMZN and PCLN both are holing moves off their recent lows as well. These could provide some leadership for the broad markets moving forward as well. They will act a barameter for the broad markets short term.

The losers remain technology and the semiconductors. This is not a good sign, but it does reflect the economic picture with growth stocks showing the biggest struggles. They are a reflection of the rotation of money from growth to value or safer investments. The SOX index fell back to 372 support and 363 is the next stop. Not a healthy looking sector at all.

Financials have tried to rally, but the downgrades and worries relative to earnings continue to hang over the sector. The wait won’t be long as the big banks are first up in the earnings parade. Without the leadership from both technology and financials it will be hard to make any upside progress.

The week will be filled with plenty of data, watch the downside risk of earnings and focus on principle protection. This is a traders market and it is working towards being a stock picking market as the sectors struggle to find any momentum.