Minyan Mailbag: Chemical Imbalance?
Looks a little scary to me
Noticed, over the last couple weeks, relative outperformance of the CBOE S&P Chemicals Index (CEX) and its related components.
Notably: E.I. du Pont de Nemours and Company (DD), The Dow Chemical Company (DOW), Rohm and Haas Company (ROH), Praxair, Inc. (PX), Air Products & Chemicals, Inc. (APD), Avery Dennison Corporation (AVY), Eastman Chemical Company (EMN).
Great question. I'll show you how I evaluate the significance of the relative strength relationship you have spotted. Outperformance for a financial instrument can occur in one of two ways; by virtue of going down less than what the instrument is being compared against, or by rising faster than what the instrument is being compared against.
I looked at the CEX vs. the S&P 500 to determine the relative strength.
The chart below shows the CEX has indeed reversed up on a point & figure basis versus the SPX, indicating the relative outperformance you mentioned. The reversal is very recent, having occurred on October 26.
Now, I want to understand what kind of relative outperformance we are seeing. Is the outperformance positive in an absolute sense, or negative in an absolute sense.
Since Oct. 26, the reversal up for the CEX vs. SPX, the CEX is down .286% while the SPX is down 1.05%. Negative absolute performance.
This is not surprising since the market indicators I use say the overall context of the market is negative. Moreover, when I look inside the CEX at the individual issues, I see the components themselves are mostly trading in a negative context. Only 30% of the components of the CEX are on a point & figure buy signal, and only 38% of the components are in a long-term positive trend. The chart below shows the CEX has recently bounced off long-term multi-year trendline support, but remains on a sell signal. CBOE S&P Chemicals Index (CEX)
This to me suggests the CEX outperformance is a lesser of evils event. In other words, if you have to be long stocks when the tide fo the broad market is negative (and for a variety of reasons many people do - after all, there is a certain risk involved in not being invested in stocks -) then you at least want to be in those sectors that are showing relative outperformance regardless of whether that outperformance is positive or negative in an absolute sense. Sectors and stocks that are outperforming during negative environments tend to be leaders in positive environments.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter