Sector Breadth Confirms Broad Equity Strength

Want to find something bearish on the market? It’s not hard to throw a rock and find a piece of pessimistic data or commentary that will feed an equity bears appetite. I know my personal bias is to lean more cautious when evaluating the markets, but when the data that I rely on is telling me something different I must respect what its showing. That brings me the market’s breadth, specifically the Advance-Decline Line, which has confirmed the recent strength in U.S. equities (here and here).

We can take this breadth analysis a step further by looking at the individual sectors, and seeing if the strength in the broad market’s breadth is relying heavily on just a few sectors or if strength is stretched across the entire market. Below I have listed the nine S&P sectors using price only data (not adjusting for dividends) and their respective Advance-Decline Lines. The Advance-Decline Line simply adds and subtracts the number of stocks going up and down in a cumulative total. If more stocks are rising, the line will rise and vice versa when more stocks are declining. I use this type of indicator to understand if there’s support for an underlying price movement. If a market or ETF breaks out, I prefer to see broad participation by the underlying stocks.

Materials
While the sector itself is still nearly 8% off its high, its respective Advance-Decline (A-D) Line is already nearly back to its prior high.Materials

Energy
While the Energy sector ($XLE) is still in a down trend of lower highs and lower lows, it’s breadth has improved somewhat as it advances with price to challenge its prior high.Energy

Financials
Financials ($XLF) have been one of the worst performing sectors YTD, largely attributed to the declining yield curve. However, when looking at the performance of the individual financial names, the $XLF A-D Line is already at a new high.financial

Industrials
When taking into account dividends, $XLI is already at a new high but when looking at just price it still sits a few cents under its 2015 peak. But once again, the sector’s breadth measurement has already set a new high. industrial

Technology
Tech ($XLK) is right at its 2016 high and is just itching to breakout and so far it has the full support of its A-D Line as it broke its April ’16 high back in June.
technologyConsumer Staples
$XLP has been in a clear up trend as it makes new highs in price for the bulk of the last year. What about its Advance-Decline Line? Yep, right there with it as it marches higher.
consumer staples

Utilities
Utilities ($XLU) has been one of the stronger performing sectors YTD, clearing its 2015 high back in May. It’s A-D Line has created almost a straight line higher as individual utility names retain their up trends.utilities

Health Care
The Health Care ($XLV) sector still sits below its high but has recently broken above a level of resistance around $73. The A-D Line for the sector has been leading price higher, having already made a new high.health care
Consumer Discretionary
The Consumer Disc. ($XLY) sector is just under its prior high but its breadth has already broken out.consumer disc

As you can see, from a breadth perspective using the sector’s individual Advance-Decline Lines, the market appears to be much healthier than what the macro economists would lead you to believe. I understand profit margins are contracting, margin debt is high, Europe is falling apart but there is a difference between economies and markets, and we’re seeing a clear separation when looking at the major nine S&P sectors and their respective breadth indicators.

While it’s possible we see the market digest these gains and see some type of back-filling, it’s hard to argue that the current up trend is anything but strong based on the underlying breadth strength in the S&P 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.

Is It Time To Catch the Falling Knife in the Energy Sector?

The Energy Sector ($XLE) has been an awful performer over the last several months. While consumers cheer at the decline of prices at the pump and economists get anxious about the impact of falling oil prices will have on GDP. Luckily as technicians we aren’t as concerned about why a market acts the way it does.

Back in July I wrote about the bearish chart setup for the energy sector and why I thought it was due to pullback. On Monday, I showed the chart of the relationship between XLE and SPY, with it being the first time monthly momentum having entered ‘oversold’ territory. Being the worst performing sector year-to-date, is it time to start looking to catch the falling knife? The latest price action and historic lows in sentiment may help provide some key insights.

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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.

Weekly Technical Market Outlook 12/1/2014

It’s been a few weeks since I’ve done a Technical Market Outlook post, but I’m back and ready to run through some charts.

We’ve seen the U.S. equity market continue to grind higher, being led by large caps ($SPY) with Small Caps ($IWM) under-performing over the last couple of weeks. Bond traders have still shown a lack of interest in risky assets, and international markets have remained in the shadow of the S&P 500, all while commodities have disappointed. Spot gasoline prices took a fall on Friday, dropping 9% and Crude Oil fell even harder, down over 10% for the day.

Trend
As the S&P 500 ($SPX) continues to hit new highs, the up trend remains in tact. We also have the 20-day and the 100-day Moving Averages upward slopping which is a good sign for equity bulls.

TrendBreadth
In my opinion, breadth is currently a mixed bag. The chart below shows the NYSE Common-Stock Only Advance-Decline Line, which has broken above its falling trend line but has yet to make a higher high and confirm the rise in the equity market. We also have the down trend in the Percentage of Stocks Above Their 200-day Moving Average. However, the Advance-Decline Line for the NYSE has hit a new high, which was helped by its inclusion of some bond funds. The S&P 500 and the Nasdaq Advance-Decline Lines have also confirmed their respective index’s move.

With three of the four major A-D lines hitting new highs, this is likely to be viewed by most in a positive light. While I had been cautious of the advance due to a lack of breadth confirmation, the measurements mentioned above have eased the bulk of my concerns.

breadthBreadth Part Two
On October 15th, just as the S&P 500 was finding a bottom I wrote a post called “We Haven’t Seen A Market Top Yet.” In that post I showed the following chart, which has a unique measure of market breadth. The blue line on the chart measures the S&P 500 components relative to their respective 52-week high and low. Rather looking at just whether stocks are rising or falling like the Advance-Decline Line; this indicator is more concerned with where the stocks are relative to their prior moves which can give us a better idea of market internals to some degree.

In my October post I wrote that in 2007 we saw much more deterioration in this breadth measurement compared to where we were at the September ’14 high. I wanted to see if the divergence widened when the market rose and tested or made a new high. Well now that this has happened I wanted to check back in with this breadth indicator. Unlike in 2007, more S&P 500 components have gotten closer to their respective 52 week highs. We are currently testing the September level and the indicator is back in a health range, well above were we were at the ’07 peak.

While there are still signs that things maybe extended, I do not believe we are currently seeing the same level of corrosion in breadth like we were in prior market tops.

relative to 52wk

Momentum
The divergence in the Relative Strength Index that sent up a warning flag in September is no longer present as the momentum indicator has once again broken above 70, and is now giving an ‘overbought’ reading. As a reminder, being ‘overbought’ while can lead to short-term weakness is a longer-term positive as it shows strength within a market.

The MACD has also cleared out its divergence, however one piece of the MACD that does have me concerned about the short-term is the histogram. Like in March and August/September of this year, the histogram has been diverging from price and is almost negative. The Histogram of the MACD indicator is simply the difference between the ‘fast’ and ‘slow’ lines represented. This type of divergence often gives an early warning to a crossover of the MACD lines, which is bearish for price.

momentum

Energy Sector
The slide in the Energy Sector ($XLE) has been picking up steam, down nearly 8.5% year-to-date. Back in July when it seemed like everyone loved the energy space and thought $XLE could do no wrong, I wrote about whether the sector was due for a pullback. The RSI indicator was at its highest level ever, price was the furthest above its 200-day Moving Average since the 2011 and 2008 peaks, and price was testing a long-term level of potential resistance. That day ended up marking the peak for $XLE and it hasn’t looked back since.

Now, we have another interesting chart for the energy space, this time relative to the S&P 500. Below is a monthly ratio chart of $XLE and $SPY. Since the inception of these two ETFs we have never seen the Relative Strength Index (RSI) fall below 30, until now. Momentum has just been getting pounded as the U.S. equity market rises and energy gets destroyed. Looking at the prior lows in 1999, 2000, and 2003 we can draw a trend line that may act as support if we see the relative performance between these two continue to favor $SPY.

xle spy60-Minute S&P 500
It’s been interesting to watch the intraday movement of the S&P 500 since the prior low. Price has been able to hold above the 50-1 hour Moving Average since it last crossed above it in October. The Relative Strength Index (RSI) has also done a great job at holding support near the 50 level, which is where we find it after the close on Friday. The MACD has been declining for the bulk of the advance. I would not call this a divergence since the decline does not include any significant swings in price for the S&P. I’ll be watching to see if the RSI continues to hold support and if price also remains above its Moving Average.

60 minYield Curve
As I’ve discussed multiple times, the bond market is either disconnected from equities or is not feeling the same level of jubilance as stock traders. The yield curve does a good job at depicting this. Over the last 25 weeks, the Rate of Change for the bond curve is down nearly 22%, a level we haven’t seen since the 2011/2012 lows. A declining yield curve can be trouble for the financial sector. While financials have not been a star performer this year, they have been able to outpace the broader index YTD. The yield curve is likely on everyone’s radar and the repeated drumbeat of new lows is becoming hard to ignore.

yield curveSector Relative Rotation Graph
Below is the RRG for the nine S&P sectors. This graphic shows the trend in performance as well as the momentum of that trend for the sectors relative to the S&P 500, for more information go here. In the current depiction of the RRG we can see the strength in Utilities ($XLU) and Consumer Staples ($XLP). While Health Care ($XLV) has been a leader this year, it has begun to see its trend momentum weaken as it nears the ‘Lagging’ category. The Financial ($XLF), Consumer Discretionary ($XLY), and Material ($XLB) sectors are also experiencing weakened trend momentum.

sectors rrgLast Week’s Sector Performance
While it was a shortened week with no doubt lower volume due to the Thanksgiving holiday, we still had some trading days to look back at. For the week, Consumer Discretionary and Technology led the way relative to the S&P 500. With Energy of course being the worst performing sector followed by Materials.

last week sectorYear-to-Date Sector Performance
Looking at the last 11 months of 2014 the sector leaders have rarely changed. Health Care is back in the top spot followed closely by Utilities and Technology. Energy holds the up the rear along with Materials, Consumer Discretionary, and Industrials as the four sectors still under-performing the market YTD.

YTD sector

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.