Market Outlook and Materials vs. Consumer Cyclicals

First, apologies for the recent lack of blog posts, but I've explained in the past my current situation (ongoing job search due to my employer shutting down). With regards to the market, frankly I haven't had much to say since my posting on February 11th. On February 3rd, when the S&P 500 was around 1780, I wrote that I wanted to see at least two things occur to confirm a bottom, 1) the S&P 500 put together three consecutive up days off this low or one significant up day with a bar/candle range spanning 15-20+ points, and 2) the MACD to trigger a buy signal, i.e. for a bullish crossover to occur in the 12- and 26-day EMAs, also shown with a positive histogram. Both of these conditions were achieved on February 11th, see chart below (orange line).

Since February 11, the S&P 500 has risen 4.3% and is fast approaching the upper-bounds of an ascending channel (red lines). Longer-term the market remains in a solid uptrend, however several oscillators currently reside in overbought territory and I would expect this rally to slow down, consolidate sideways or even pullback from these levels.

The weekly S&P 500 chart below also suggests an interim peak may be at hand:

Despite the fact the S&P 500 is up YTD, attaining a new all-time high, note that the weekly MACD has yet to confirm this rise in the Index, instead remaining in a downtrend and establishing a bearish divergence. As shown in the chart above, a few negative divergences have developed over the last few years and all eventually resulted in a market pullback or correction, some more severe than others. 

One of the more interesting developments YTD is the erosion in relative performance of consumer cyclical stocks (I wrote about on January 21 and February 14) and the resurgence in what has been a longtime laggard, the materials sector.

The weekly chart above plots the relative performance of the XLB vs. XLY (or Materials SPDR vs. Consumer Discretionary SPDR). In late December, the XLB:XLY relative price successfully broke through a two year declining trend line and XLB's outperformance over XLY has continued into 2014. 

Will this trend continue? A significant factor will be the strength of the US dollar.

The weekly chart above shows the relative performance of the XLB vs. S&P 500 (lower inset) and the US dollar (USD, upper inset). It's fairly plain to see an inverse relationship exists as the relative return of material stocks tends to fare better when the USD is weak and declining. 

Regular readers know that I turned bearish on the USD last October and I have yet to see a compelling reason that warrants changing that stance. The US dollar is down since early October and the weekly chart above shows the USD has been carving out a descending triangle formation of sorts since the 2Q of last year. If the USD breaks to 79 or worse, it would signify a clear breach of support as indicated by the gradually ascending trend line. I would also point out the developing two-year bearish divergence between this modestly rising trend line (higher lows) and the downward trending MACD indicator, which also resides below zero. Finally, the Death Cross condition remains in place for the USD, i.e. the 50-day MA is below the 200-day MA.

(Source for all charts: Stockcharts.com)