Charting the Big Breakouts in Defensive ETFs XLP XLV XLU

I wanted to show a follow-up to my prior post “Clear Bearish Signals Developing from the Sector Rotation Model,” and focus on the breakouts in the “Big Three” Defensive Sector ETFs:  Staples, Health Care, and Utilities.

Let’s take a quick look at the similarities – and strong recent breakout – in these defensive funds.

First, Consumer Staples – XLP:

Next, Health Care – XLV:

Finally, Utilities – XLU:

To keep it simple, I’ll be describing the charts above as a group, instead of individually.  I think it’s more important to see this concept as a whole/broader picture rather than individually in each ETF.

Collectively, these three funds comprise the “Defensive Block” of the Sector Rotation Model, as these groups generally outperform the broader market during declines (“hold their own”) while these same groups underperform the market during lengthy rallies.

By looking at these names, we observe Sector Strength which gives us a glimpse into the mindset of larger funds and their expectations for the future (answering the question – are they rotating into offensive/bullish sectors or defensive/bearish sectors).

The key fact now is recognizing a clear defensive rotation occurred after the March lows which corresponded with the Japan earthquake/tsunami/nuclear crisis.
These three funds – especially the Consumer Staples ETF – have moved straight up on higher volume ever since the Japan situation.

The broader stock market has not – instead, stocks peaked on a marginal new high on May 2nd and have struggled ever since – clearly not moving straight up.

As such, we should continue to monitor this situation as it develops – as it stands now, it is a caution/warning sign for the broader market as money is flowing into defensive sectors as uncertainty/risk increases.

Keep focused on the S&P 500 at the 1,300 level for a price confirmation of a bearish break, otherwise this is merely a warning sign of caution that would be called into question on a firm S&P 500 breakout beyond 1,370.