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Cyclicals testing upward trend

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While many telecom stocks grab today's headlines with earning's warning, one group I felt needed to show continued strength for "economic bulls" to make their case of a recovering economy just broke below its 50-day moving average and now tests upward trend dating back to the September lows. Two weeks ago, the Morgan Stanley Cyclical Index (CYC.X) 569 -1.6% answered the call and rallied strong from its 50-day moving average, but has started to show some weakness in recent session.

Morgan Stanley Cyclical Index Chart - Daily Interval

The deeper cyclicals as depicted by the CYC.X have been drifting lower the past four sessions and now sit right on upward trend. The break back below the 50-day moving average is an early alert to near-term weakness. Should the upward trend not hold, then I expect weakness to the 555 level near-term. Depending on the "sharpness or rate" of a break in upward trend, then risk for bulls needs to be assessed to the 541 level potentially.

Last week we talked about an earnings report from Freeport McMoran (NYSE:FCX) $18.42 +1.09% and this miner of industrial metals reporting earnings that beat the Street's estimates, but cited the company's comments that metals prices were rising due to a lack of supply and not necessarily an increase in demand from industrial customers. Those comments have us on the alert that the recent rise in both industrials grades of copper and gold have most likely been due to some near-term supply shortages and not necessarily increases in demand, which would have been the case under a more robust pickup in the industrial sector.

As such, we're closely monitoring the upward trend on the deeper cyclicals to see if trend holds.

Precious metals prices are higher across the board today, and we're seeing May Copper (hg02k) $0.74 +0.95% hold earlier morning gains after trading as high as $0.7495 earlier this morning. A move above the 0.7509 could have Phelps Dodge (NYSE:PD) $37.89 - 3.46% finding some support after breaking below key support of $38.71 early this morning.

Homebuilders trade strong

Today's sector gainer is somewhat surprising as the Dow Jones US Home Construction (DJUSHB) 367 +2% leads our sector gainers list. Below is a "hot list" from q-charts in the construction services. This is not a component list of the DJUSHB, but does give subscribers some names to be looking at that are showing some strength today.

Construction Services - Sorted by volume

Share of DR Horton (NYSE:DHI) are one of the more actively traded stocks after the homebuilder reported a 72% increase in fiscal second-quarter profit and raised its full-year outlook.

Jeff Bailey
Senior Market Technician
Option Investor

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