Which Sectors Are Leading the Market?

With the increase in volatility over the last several weeks, I think it’s time to check back in on sector relative performance. While the U.S. equity market as a whole has gotten rocked since it’s August/September high, understanding what the underlying sectors are doing and what’s leading can be a great tool to stay in control. Over the last 30 days, the S&P 500 has lost 3.5% of its value, Utilities ($XLU) and Consumer Staples ($XLP) are actually positive and the Energy sector ($XLE) is down over 10%. While the S&P 500 ($SPY) often garners the most attention, we can’t lose focus of the nine S&P sectors that make up the index.

Health Care ($XLV) has been a consistent leader this year, spending the bulk of the last 30 weeks in the ‘Leading’ category of the Relative Rotation Graph (shown below). The Relative Rotation Graph (RRG) plots the sectors using their the trend of their relative performance against the S&P 500 as well as the momentum of that trend. Historically the sectors have moved in a clockwise fashion as they go in and out of favor relative to the index and as the momentum of their relative performance rises and falls as well.

About three weeks ago we saw that the Technology sector ($XLK) began to turn lower but remained in the ‘Leading’ category. Since then, and over the last several weeks, this once leading area of the market has shifted into the ‘Weakening’ category throttled by the decline in the momentum of its relative performance.

It’s also important to note the strength out of Financials ($XLF), and Consumer Staples. In a post on September 29th I highlighted the ratio between $XLP and the S&P 500, which was seeing a bullish divergence in momentum and ultimately led to the defensive sector outpacing the market for the last several weeks. Energy ($XLE) has continued to sink deeper into the depths of the ‘Lagging’ category with the momentum of its under-performance intensifying.

RRG chart

2014 has seen the theme of defensive strength with Utilities, Health Care, and Consumer Staples, leading the way for the bulk of the year. This likely worries equity bulls as traders steer away from the higher beta components in favor of the perceived safer sectors.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Using COT Data To Identify Turning Points In The Market

While I’ve been writing for See It Market for several months, it’s a great honor to write a “Market Masters” article. With my focus being towards technical analysis I am constantly watching the latest price action and in search of the best risk/reward relationships. These can be derived from momentum or breadth setups, which I’ve written about quite a bit, extremes in market sentiment, as well as within the actual positions being held in the options and futures market.

To keep reading and to see the different ways to use COT data and how useful this type of analysis can be, click here (See It Market).

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

We Haven’t Seen A Market Top Yet

While I color myself concerned about the selling taking place in stocks, I do not think we have seen the top, not yet at least.

It never ceases to amaze me how fast the sentiment changes in the market. We go from cheering on new highs to people already looking for an 1987-type crash. Don’t get me wrong, it makes my uneasy when I read an article in GQ where the author, while writing about stripes, throws in lines like: “Button up one of the bolder striped shirts out there and you’ll be ready to do more than push stocks” or “built for mergers, acquisitions.” You rarely want to see references to Wall St in non-financial publications and while this one was subtle it still stood out. There are many pieces of data that show retail investors have come back stocks and even men’s magazines are taking their cue.

There’s been a lot of discussion about whether we have seen the peak in the stock market and if we are about to see a repeat of 2007. Business Insider has been running stories about the anonymous twitter user who may have called the top even though we are down just 7%, which is less than the corrections we saw in 2010, 2011, and 2012.

While I can understand the similarities between the prior peak and the current price action, I do not think we’ve seen enough deterioration in breadth and momentum in order to be confident that the S&P 500 ($SPX) will not make a new high in the coming weeks.

In late-September I showed the divergences that were taking place in the Advance-Decline Line (breadth) and the Relative Strength Index (momentum) and how they were acting as negative symptoms that could send prices lower. While they were in fact diverging, they had not separated from the equity market to the same degree as prior market tops.

A different example is the following chart showing the S&P 500 components relative to their respective 52-week high and low. The more stocks that are closer to their own 52-week low, the farther down the line falls. You can see that at the 2007 high, the divergence was much more pronounced than the small separation we have today. Before the small decline in July and August of ’07 we saw this indicator diverge just like it’s during right now. I’ll show why this may be important later on.

S&P relative

How about momentum? We do have a bearish divergence that developed at the most recent high but again, it was not at the same degree as we saw in 2007. Momentum (like breadth) was much weaker going into the market top than it is today. Like the chart above, a smaller divergence was created that led to the July/August drop prior to the ’07 peak.

RSI

If we must (do we have to?) compare this market environment to something then it seems more like July/August of 2007 than October 2007. The drop that lead to the market top in ’07 lasted roughly 9% and set up both breadth and momentum to create much larger divergences as fewer stocks participating in the advance. The July high as I showed in the two charts above had bearish divergences present, but they were less severe, like they are now, than what eventually was created into the actual peak.

So while the sectors that have been leading this year (Utilities, Consumer Staples, and Health Care), the breakdown in High Yield bonds, and the start of breadth and momentum weakening are very reminiscent of the prior market high, I don’t believe we are there quite yet. It sure seems like there are a lot of traders preparing for a market crash and we rarely see the market give the people what they want. Another advance to a new high before stocks sell-off again may just be what catches the most traders off guard.

This isn’t the market environment that makes me put on my bull hat but at the same time I think patience is key and we need to see how price action shapes out over the next two weeks. There are plenty of signs that stocks may have over-extended to the downside, it’s just a matter of if Mr. Market decides to care. I could be wrong and if that’s the case then I’ll happily switch my bias to reflect the latest price action. As always, I continue to respect what price is telling us, but if history is our guide then we likely have not seen the market peak just yet.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.