Technical Tuesday: Trouble Ahead?

by Christopher Rowe, Technical Strategist, The Oxford Club
Stock market graph on a tablet computer

Whenever a bull market corrects, investors ask themselves: Could this bull run be over?

Today I'll give you one big indication that historically has spelled the end.

Very simply, when the sector that had led the market breaks down, it's a major sign of a long-term top. Do you know which sector led the current bull market higher?

I'll get to that in a minute, but first, a little history about the two previous bull markets...

2002-2007

The bull market from 2002 to 2007 was led by the financial sector. Low interest rates sparked the run-up in real estate and the creation of leveraged investment vehicles that ultimately led to the global credit crisis.

Sure, commodity stocks and utility stocks outperformed the financial sector by two- or threefold, but due to the heavy weighting of financial stocks on the major market averages, that sector had the biggest influence on the bull market.

We saw the sector lose strength and then break down in the first half of 2007. The decline was especially pronounced in the second half of that year.

1994-2000

Tech stocks led the bull market higher in the late 1990s. The majority of small cap stocks began topping out in the first half of 1998 as the heavily weighted technology sector went parabolic. The market charged higher for a while. But as soon as tech stocks cracked in March 2000, that was a clear warning sign of the stock market top.

2009-Present

That brings us to today.

The "consumer discretionary" sector is the major S&P sector that led the market higher in 2013.

Below is a chart showing the 2013 performance of all nine S&P 500 sector ETFs. What the chart refers to as "Cyclicals" is actually the Consumer Discretionary SPDR ETF (NYSE: XLY). Notice how it was the best performer last year with a 42%+ gain.

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Below is another chart from the key market low set on Oct. 4, 2011, to Dec. 31, 2013. Note the same sector is the leader since that period, up 97%.

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Finally, take a look at the performance of January 2014. The consumer discretionary sector was the worst performing sector last month.

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We can't expect this sort of indicator to always show us the exact top of the market. Alex Green wrote a great piece yesterday about the big risk and negative impact of being a market timer.

But it pays to watch the key leading sector in a bull market to get a sense for when is the best time to hedge your positions.

By following the long-term trends, we have plenty of time to act when we see evidence pile up that a long-term trend might be near its end.

Let's keep a close watch on the consumer discretionary sector for 2014. I'll keep you posted on what I'm seeing in some of my future articles. And I would love to hear your opinion on this topic, so feel free to comment by clicking the link below.

Good investing,

Chris

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A Great Way to Play the Energy Boom

For many people, the most depressing time of the year is right now. The holidays are over. The weather (in most places) is bleak. The days are short. And it's almost time to pay Uncle Sam his annual ransom.

On that last point, though, we have some advice. One great option for mitigating the amount you owe is to invest in master limited partnerships (MLPs), which occupy a section of tax law that treats the dividends they pay as a return of investors' own money, and therefore not subject to tax.

And one of the oldest and best-performing MLPs in David Fessler's Peak Energy Strategist portfolio is MarkWest Energy Partners L.P. (NYSE: MWE). MarkWest rose during January's market correction. It's up 5% this year, and 53% since Dave added it in late 2011. And it sports a 4.6% dividend yield.

Here's what Dave told us following MarkWest's third quarter earnings announcement:

"MarkWest... gathers, processes and transports natural gas, natural gas liquids and crude oil.

"The company is currently very active in the Utica and Marcellus shale plays. Right now, the partnership has 22 fractionation facilities and major processing plants under construction.

"Most of MarkWest's revenue comes from fee-based contracts. The percentage of net revenue from contracts increased from 53% to 62% when compared to Q3 2012.

"Q3 2013 was another quarter of record volume growth for the partnership. MarkWest continues to 'build ahead' of its producing customers in the Marcellus and Utica Shales...

"The company's Marcellus business is driving a large portion of its volume growth. Marcellus volumes increased 9% in the last quarter alone, and were up over 115% from Q3 2012.

"MarkWest currently operates five Marcellus natural gas processing complexes. Current throughput is 1.8 billion cubic feet per day (Bcf/d). By the end of 2013, two more processing facilities will be operational, increasing throughput to 2.2 Bcf/d.

"As an indication of how fast volumes are increasing in the Marcellus, MarkWest plans to install five additional processing plants in 2014. These plants will add an additional 0.9 Bcf/d of throughput capacity.

"MarkWest has long-term, fee-based contracts for nearly all the gas running through its pipelines and facilities. Many of the major producers in the Marcellus area are customers of MarkWest...

"To put MarkWest's developments in perspective, in five years the company will have commissioned 2.2 Bcf/d of processing capacity. It's also announced an additional 2.3 Bcf/d of capacity. It's all in support of the booming growth in the Marcellus and Utica plays."

- Bob Keaveney with David Fessler

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