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Tickers in this Article: DIA, EEM, GLD, IWM, MCD, QQQ, SH, SLV, SPY, TLT, XLE, XLM
Technical evidence is mounting that seasonal sector rotation is taking place right now, and it is crucial for investors to know which areas to lighten up and which to buy. Here, MoneyShow senior editor Tom Aspray shares the most likely profit opportunities during and after this shift.

It was an impressive week for the stock market. After Tuesday’s plunge, stocks rebounded for the rest of the week, and the major averages closed higher for the week. The most impressive action was in the small caps. The iShares Russell 2000 Index Fund (IWM) was up almost 1.5% for the week, far better than the 0.5% gain in the Spyder Trust (SPY). It had been correcting since early February, and as of last Tuesday’s close was down 5.5% from its highs. Small caps can often give leading signals for the overall market, as was the case in April 2011, when they topped out well ahead of the S&P 500. The strength of this rebound from the lows indicates this is not the case this time.

Though not all of the technical warnings have been resolved, it looks as though the group rotation over the past six weeks has been the correction I was looking for in the major averages. As I discussed in Friday’s column “3 Sectors Leading the Charge,” the energy and materials sectors, like the small caps, have also corrected significantly from their 2012 highs. They could therefore fuel a further rally in the major averages, even if financials and technology take a rest.

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Stocks have certainly been the place to be in 2012. This performance chart shows that the iShares MSCI Emerging Market ETF (EEM) and the Powershares QQQ Trust (QQQ) are both up well over 15% since the start of the year. The more broadly based Spyder Trust (SPY) is up only 9.7%, with the SPDR Gold Trust (GLD) up 9.2% despite its recent correction.

The euro is up slightly for the year, while bonds have been lagging after a spectacular performance in 2011. The iShares Barclays 20 Yr Bond ETF (TLT) is down almost 5% so far this year. The interest rate market is one that needs to be watched closely. Some of the high-yielding mortgage REITs were hit hard last week, and could drop even more. Yields on the ten-year Treasury closed well above 2%.

The economic news both here and overseas was generally positive, and the better than expected monthly jobs report on Friday helped fuel the bullish sentiment. The apparent completion of the bond swap late last week appears to have finally cleared the way for Greece to get its next round of funding. This could turn the focus to some of the other vulnerable euro countries, like Spain and Portugal.

Tuesday’s plunging stock market was partially blamed on the lower official growth estimate for China’s economy, along with concerns over the Greek debt deal. Worries over China lessened late in the week, after the government reported its inflation rate had dropped to the lowest level in 20 months.

The prospects for China’s economy and its stock market are a hotly debated topic. On one hand, you have those who think the China bubble has burst and things are likely to get much worse. Other analysts think that investing in China now is one of the best long-term growth opportunities. My take? Technically, the Hong Kong market does look positive from an intermediate-term standpoint. A further correction should set up a good buying opportunity.

This week, the focus will likely be on the FOMC meeting announcement on Tuesday. The Fed’s assessment of the economy is always widely watched. Retail sales are also reported Tuesday, along with business inventories.

On Wednesday, we get data on import and export prices, while the weekly unemployment claims will follow on Thursday. Also out Thursday is the Producer Price Index, the Empire State Manufacturing Survey, and the Philadelphia Fed Survey.

The week ends with more consumer data, as both the Consumer Price Index and consumer sentiment numbers will be released Friday, as well as February industrial-production figures. It is hard to imagine that any one of this week’s economic reports will derail the stock market rally. It would probably take a string of disappointing numbers to dampen the current high appetite for stocks

NEXT: What to Watch

WHAT TO WATCH
In last Friday’s column, I discussed the data that suggested individuals were selling instead of buying as stocks moved higher. Last week’s action certainly demonstrated that there were a healthy number of buyers who were ready to support the market.

The sentiment numbers last week suggest that the individual investor is becoming more cautious. The AAII survey reported that the bullish percentage dropped to 42.3%, after peaking in early February at 51.6%. The number of bullish financial newsletter writers also decreased, to 47.9%, down from a mid-February high of 54.8%. A further decline in the number of bulls would be positive.

The recent deterioration in the market internals were warning of a drop like last Tuesday’s. As most of the Advance/Decline lines broke support, it suggested that the market’s decline was not over. Over the years I have seen similar setups, and in a majority of cases the market rebounds for two (but not three) days and then resumes its decline.

The strong rally from the lows invalidated this analysis, and the longs I recommended in the ProShares Short S&P 500 ETF (SH) were stopped out with a loss of 1.5%. The good news is that most of the stocks that I have recommended added to their gains as the stock market moved higher.

The next major target for the S&P 500 is in the 1,380 to 1,400 area. My analysis of the Advance/Decline lines shows that most are close to making new highs, which would be positive. Clearly, last week’s action has reinforced the value of concentrating on individual stocks. Two of my recent energy recommendations dropped into their suggested buying zones last week before turning higher late in the week.

The lagging action of some Dow stocks, and the recent drop of market leader McDonald's (MCD), suggests that we are seeing a group rotation. Moving into some of the sectors that have already corrected might be a good idea.

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S&P 500
The daily chart of the Spyder Trust (SPY) shows that it closed below the 20-day MA for two days last week, but closed the week well above it. This was the first time the SPY had hit this moving average since December 20. Clearly, last week’s lows of $134.26 are now an important level of support to watch. The support zone in the $133.80 to $134.50 area was mentioned last week.

It appears that the SPY will now test the resistance at $138.26, which is the 78.6% Fibonacci retracement resistance, as well as the Fibonacci equality target (100%) from the October rally. There is likely to be psychological resistance at $140, with two trend lines converging in the $142.50 area (lines a and b).

The daily on-balance volume (OBV) broke its downtrend (line d) before the end of the year, signaling the stock market’s rally. It tested its short-term uptrend (line e) last week. A drop in the OBV below last week’s low would be a sign of weakness.

The S&P 500 A/D line (not shown) has moved back above its flat WMA, and will close the week at marginal new highs.

NEXT: More Stocks, Sector Focus, and Tom’s Outlook

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Dow Industrials
The SPDR Diamonds Trust (DIA) dropped back to test its uptrend from the October lows (line b) before reversing to the upside. For last week, the low was $127.18, and there is further chart support (line a) in the $126 area.

The Dow Industrials A/D violated its uptrend (line c) last Tuesday, but closed back above it on Friday. It made slightly higher highs, but its WMA is now flat. The long-term uptrend for the A/D line is much lower (line d).

A decisive close above $130.50 is needed to suggest a move to the $131.50 to $132 area.

Nasdaq-100
The PowerShares QQQ Trust (QQQ) closed last week back at its upper trading channel (line e), and made marginal new rally highs at $65.12 on Friday.

There is next resistance from 2001 at $65.61, with a Fibonacci price target of $67.15.

The Nasdaq-100 Advance/Decline (A/D) line dropped below its WMA last week and tested its uptrend (line h), but closed the week well above the prior highs, which is a positive sign

Last week’s low was $63.23, and while the 20 day EMA was broken, QQQ did not close below it.

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Russell 2000
The iShares Russell 2000 Index Fund (IWM), as I noted earlier, had strong performance last week after testing the uptrend (line c) and the support in the $78.40 area. The long-term support (formerly resistance) is in the $77 area (line b).

A daily close above the resistance at $83.06 will reassert the uptrend and project a move to the $84 to $85 area.

The Russell 2000 A/D line had formed lower highs for the past five weeks (line d), which was a sign of internal weakness. The sharp drop last week is normally consistent with a further decline. The rebound in the A/D line has been impressive, and it is now testing its downtrend and the declining WMA. If a new uptrend has begun, I would expect the A/D line to form a pattern of higher highs and higher lows.

Sector Focus
In Friday’s column, I took an in-depth look at the major sector ETF. I explained why I am watching the Select Sector SPDR Energy (XLE) and the Select Sector SPDR Materials (XLB) closely for signs that they have completed their corrections.

NEXT: Bonds, Commodities, and Tom’s Outlook

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Interest Rates
Yields on both short- and long-term Treasuries rose last week. This weekly chart of the 30-year T-Bond shows that yields closed just over 3.2%. A move above 3.45% (line a) will set the stage for a rise in yields to the 3.8% to 4% area.

The MACD-Histogram moved above the zero line in December (point 2), as yields closed at 3.02%. The MACD-Histogram had turned negative in March 2011 (point 1), when the yield was at 4.42%, so it did a good job of forecasting last year’s decline in yields.

There is support for yields now at 2.94%, and then more important levels at 2.87% (line b).

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Crude Oil
Crude oil dropped down to good support, basis the May contract, in the $105 area last week. This corresponded to a retest of the breakout level of the flag formation. Upside targets from the formation are in the $115 to $116 area.

Crude oil did rebound nicely, and closed well above the lows. It is possible that the correction is now over. More analysts are now wondering whether “crude oil will crush the recovery.” The next resistance stands at $108.50, and a close above $109 should signal that the uptrend for crude oil has resumed. On the other hand, if we get a test of last week’s lows, it should set up a good buying opportunity.

Precious Metals
The SPDR Gold Trust (GLD) dropped sharply with stocks, which was typical follow-through selling after the sharp drop on March 2. GLD dropped below the 38.2% support, but held above the 50% support level at $161.07. The more important 61.8% support is at $158.

There are no real signs yet that GLD has bottomed yet, even though I do expect prices to be higher later in the year.

The iShares Silver Trust (SLV) dropped below key support at $31.80 before rebounding. I still think a close below this level will signal a decline to the $30 area. There is now first resistance in the $34 to $34.50 zone.

The Week Ahead
The action in the stock market last week was indeed choppier—down the first two days of the week and up the last three. The still relatively high bullish sentiment is a concern, and I am not expecting any negative economic news to quell the enthusiasm. There were some positive signs in the energy stocks last week, and I also recommended two utility stocks that had dropped back to good support.

The utility stocks are entering a strong seasonal period, and for those with a low exposure to stocks, they offer attractive yields. They should also hold up better if the market becomes more defensive. Rotating into the sectors that have already corrected should be a good strategy in this market.

Several of the stocks I have recommended since October were stopped out last week, but taking profits and raising cash gives one the opportunity to do new buying when the opportunity presents itself. For those who want to protect existing profits, stops under last week’s lows would be a good idea.


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