Market Leaders Mixed On Future Direction

Early this month, the market's leader groups that have been faithfully leading the broad market to higher ground for a year now looked as if they were having a change of heart and were leading a charge to the downside. Since then they have partially straightened up and are partially flying right again. I say partially because, of the three groups I pay attention to (retail, tech, and the Baltic Dry Index), one is strongly bullish, one is neutral, and one is worrisome.

First let's look at the broad market, the SPX (click to enlarge charts)

The leader that's bullish is retail and consumer discretionary spending as the first chart below shows. In this stage of lousy housing, lousy employment, and a lousy consumer, this would be about the last area you'd suspect of being a general leading a charge upward. Go figure. But this group has been right about the market's direction for a year. In addition to the consumer's leadership, the SPX has nice, positive divergence in the two key moving averages, the 140 and 200 ema, and the price action is staying nicely above both throughout the pull backs - a very good sign.

The bullish leader of the three is retail and consumer discretionary (RLX and XLY)

Here we see the index way ahead of the SPX in coming out of the recent downdraft even to the point of being at a new high and currently overbought on the RSI ! The market somehow doesn't seem think the U.S. consumer is all that crippled. A nice, smooth positive divergence in the 140/200 is ongoing.

Second, look at the tech stocks.

This group is neutral with the SPX to maybe slightly lagging considering the money flow condition, which is cooling. This all paints a picture of maybe some leadership rotation in a more sideways market - a point that Jim Cramer has alluded to.

But the third index is a little more worrisome, the Baltic Dry Index.

Here we see a much different look with the 140/200 ema. Even more worrisome is the fact that this one is the early warning system for all the others. It had better get back above a climbing 140 ema soon. Both the BDI and the Shanghai Index are all about China, but the Chinese stock index doesn't look this bad with the price action staying above its 140 ema. If you check out the $DJSH, you see a moving average picture more similar to the SPX albeit lagging behind it a little. Maybe all that is a little over-reaction by everyone in response to China's recent move in the direction of putting the brakes on their economy. But in the bigger picture, this is a good problem to have.

ARM Holdings Surfing The Smartphone Tsunami

ARM Holdings (ARMH) is a UK based chip designer that is parlaying its licensing and royalty talents into the smartphone revolution. They are not a high profile stock like AAPL, QCOM, RIMM, or GOOG; and were snubbed by Cramer's Smart Phone Index initiated 8/12/09. But ARMH has out performed all of these names and the index since last June, up 53% since I wrote a post about them and the smartphone hurricane on July 1 (click to enlarge)

In response to a viewer question, Jim Cramer has apologized for not having ARMH in his index, saying it should have been included. Back then, the valuation was a pain and had to be overlooked for a value investor to love the stock. After the climb since then it is even more of a pain: price/sales 8.0, price/cash flow 27, PE 70 - ouch! ARMH's eps is pretty flat over the last 10 years and, obviously, a lot of the tsunami future has been pumped into the stock price now. How much more can it take? If one had bought some back in June, one might want to take some off the table. But this stock is probably a buy on any sell-off that might send it to better valuations.

Bears on the stock point out that royalty rates are tending to come down as everyone buys a smartphone and more pricing pressure is induced. But this is countered by Morningstar's analysis that "as demand for outsourced chip designing grows, we expect this capable chip intellectual property (IP) designer to expand its footprint in more markets..." (other than the mobile market). But this strays from the tsunami. The commoditization of the smartphone may have some hard-to-predict investing consequences even as the tsunami itself advances - much like the internet revolution has left most publicly traded plays behind in its dust over the last 15 years. Here, an investor has to respect the technical condition of the related stocks and recognize when a good trend is breaking down or gearing up.