Are The Industrials Outperforming?

08/11/09 11:34:49 AM

by Alan R. Northam

Relative strength analysis compares one stock or market to another to determine if that stock or market is out- or underperforming the stock or market it is being compared to. Here the industrial market sector is compared to the S&P 500 to determine if it is out- or underperforming the market index to which it belongs.

Security: XLI
Position: N/A

The Standard & Poor's 500 is a large basket of 500 stocks representing a cross section of market sectors that make up our economy. These stocks have been divided up into nine basic market sectors known as Select Sector SPDRs, of which the industrial market sector is one. These nine basic market sectors each complete their own individual bull market and bear market trends at different periods of time, during which they either out- or underperform the S&P 500, of which they are separate and when taken together form the sum total of the S&P 500. Several of the individual market sectors are currently in bull market trends and are outperforming the S&P 500 itself. This article takes a look at the industrial market sector (XLI) to determine if it is among those sectors.

One of the most basic and most powerful techniques of determining in which direction a market is trending is called peak and trough analysis. When a stock or market is forming a series of lower troughs and lower peaks, that market is said to be in a downtrend. Such is the case for the industrial market sector from October 2007 until March 2009 (see Figure 1). However, when this series of lower peaks and lower troughs is broken, the downward trend is also broken and a new trend begins. In Figure 1 note that at the end of June XLI made a new higher low and at the end of July it made a higher high, thus breaking the string of lower peaks and lower troughs, ending the downtrend. An uptrend is defined as a stock or market that is making a series of higher peaks and higher troughs. From Figure 1 we can see that XLI has made its first higher low and higher high, putting this market sector in an upward trend.

FIGURE 1: XLI, WEEKLY. This figure also shows the MACD indicator above the price bar chart and the relative strength comparative line below.

Graphic provided by: StockCharts.com.

While XLI is now in a new uptrend, its relative strength is not. Relative strength is a form of analysis that compares one stock or market to another to determine which is the stronger. The relative strength analysis used here is a comparison of the industrial market sector to the S&P 500. The result of this comparison is shown in the line chart directly below the price chart. When the relative strength line moves higher, it signals that XLI is stronger than the S&P 500 and when it moves lower, it signals that XLI is weaker than the S&P 500. From Figure 1 note that the relative strength line has made a higher low but has not yet made a higher high. As a result, the relative strength line is still in a downtrend, signaling that XLI remains weaker than the S&P 500. As long as a stock or market is weaker than the stock or market it is being compared to, it signals underperformance and should be avoided.

While XLI continues to underperform the S&P 500 to which it is a part of, its price continues to move higher at an accelerating rate. The moving average convergence/divergence (MACD) is used to measure the acceleration or deceleration of price movement. When price is accelerating upward, it signals that price is in a strong upward trend and when price is decelerating, it signals that the upward trend is tiring and a tiring market further signals a trend reversal ahead. When the MACD line is moving upward, it is an indication that price is accelerating and when it is moving lower, it indicates that the rate at which price is moving higher is decelerating or slowing down. The MACD line is plotted in Figure 1 above the price chart. Note that it has been making a series of higher lows and higher highs since March 2009, indicating that price momentum is in an uptrend. This indicates that price is in a strong uptrend.

The Industrial market sector is now in a new uptrend. However, the industrial sector continues to underperform the S&P 500 and should be avoided at this time. While the industrial market sector continues to underperform, it is in an accelerating uptrend, which suggests that it is just a matter of time before it starts to outperform the S&P 500. Therefore, watch XLI in the days and weeks ahead for its relative strength line to break out to a new higher high to signal that it is beginning to outperform the S&P 500.

Alan R. Northam

Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at inquiry@tradersclassroom.com or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.

	Garland, Tx
Website:	www.tradersclassroom.com
E-mail address:	inquiry@tradersclassroom.com

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