Financial Sector Divergence Is Not A Major Concern ... Yet

Posted by Bigtrends on June 25, 2014 7:05 AM

Financial Sector Divergence Is Not A Major Concern ... Yet
There's a big plus for speculators in this market

by Kevin Marder

For equities, the song remains the same. Shares stay within the confines of an uptrend characterized by extremely low intraday volatility and quiet volume.  Over the last 46 trading days, the S&P 500 (SPX) (SPY) has been confined by daily moves of less than 1%, according to The Wall Street Journal. This is the longest such phase since 1995.

Volume has also been quiescent. For 30 of the past 31 trading days, Nasdaq Composite (COMP) turnover has been below its 50-day moving average. The lone exception was last Friday's quarterly witching session, an anomaly which tends to create added volume.

Nasdaq Composite Daily Chart
motm062414_nas-page-001

Charts created using TradeStation and MarketSmith.

As to the backdrop, the goldilocks scenario of 1990s-like economic growth that is neither too hot nor too cold prevails. Added to the wall of worry recently is concern over inflation. This is viewed as a substantial plus for the markets overall, as it lays to rest any semblance of a Japan-style deflationary meltdown.
The purported pickup in inflation is not a concern for shares until interest-sensitive proxies diverge from blue-chip averages for at least a few months. This includes the broad financial sector (XLF) and narrower segments like the banks (KRE) (KBE) and brokers (IAI).

As shown below, the financials are keeping pace with the large-capitalization names that comprise the S&P.

SPX& Financial Index Chart
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The banks and brokers, however, are diverging from the S&P, as shown in the following two charts.

SPX & BKX Chart
motm062414_bkx-page-001
 

SPX & XBD Chart
motm062414_xbd-page-001
 

The divergence of interest-rate proxies would carry more weight if it were to occur amid central bank tightening and lifting bond yields.

Otherwise, leading stocks act well, with few showing signs of serious liquidation.

Among the names, YY Inc (YY) is a Chinese social-media platform. The stock has been a big winner, coming public at 11 in November 2012 and cresting at a March high of 90.93. Most analysts on Wall Street who follow the issue look for earnings growth of 45% this year and 41% next. This is the type of beefy estimated earnings growth that has contributed to outstanding price moves.

Sequential revenue growth has also been impressive going back a number of quarters, as has year-over-year top-line growth. Mutual-fund sponsors have grown from 29 to 60 to 83 to 137 in recent quarters.

Technically, YY forms a constructive three-month base that began when the averages peaked on March 6. Last week, price pulled back to its 9-day exponential moving average (EMA), which coincided with a logical support area in the form of a prior, mini three-day trading range. This also happened to be at a round number (70) which can often form a psychological support or resistance level. The stock is ranked in the 96th percentile according to relative price strength over the past year.

An aggressive speculator who is open to entering a long prior to the breakout of a base might consider entrance in YY at current levels. A stop of just below the June 20 low of 69.80 would be reasonable.

YY Chart
motm062414_yy-page-001
 

Palo Alto Networks (PANW) is a developer of network security infrastructure. Most seers of the stock forecast 60% earnings growth in the July 2014 fiscal year followed by another 63% in the 2015 year. To the company's credit, quarterly revenue growth has been rock steady at 54%, 49%, 49%, 46% and 49% over the past few periods, respectively. Mutual-fund sponsors have lifted from 256 to 281 to 357 in recent quarters, respectively.

Technically, after doubling in less than four months, price has been forming a three-month, double-bottom base. It is always a moderate plus to see price breeze past a double-bottom base's midpoint on high volume. The midpoint is a pivot point that is watched by many participants. In this case, PANW cleared its midpoint about four weeks ago on a day in which price rose 5.3% on volume 359% above its 50-day moving average of volume.

Price is currently forming a handle very close to the high of the left side of its base. An aggressive operator might use the June 17 high of 82.27 as a potential entrance pivot. A logical stop might be just below the swing low of 76.27 set June 13, or about 7.4% below 82.27.

PANW Chart
motm062414_panw-page-001

Intermediate trend, breadth, and leadership are positive, while volume is negative. Shares plod higher in quiet fashion. Very few have shown the footprints of distribution. A strong plus is the character of the basing patterns - more have formed cups than in any cycle in recent memory - printed by numerous leaders. The intermediate-term speculator focusing on momentum titles has a nice menu from which to choose.
 

Courtesy of MarketWatch

 

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