MIRROR MIRROR ON THE WALL, WHO'S THE STRONGEST SECTOR OF ALL? -- SETTING A BULLISH-BEARISH THRESHOLD FOR HIGH-LOW PERCENT -- RANKING SECTORS AND ANALYZING ROTATION USING THE BPI -- INDUSTRIALS, MATERIALS AND FINANCE LEAD BPI TABLE
MIRROR MIRROR ON THE WALL, WHO'S THE STRONGEST SECTOR OF ALL... Link for today's video. Today's commentary will show chartists two unique ways to measure relative performance for the nine sector SPDRs. Note that today's video provides step-by-step instructions for creating these ChartLists. In the first example, I created a ChartList using the high-low percent indicator for the nine sector SPDRs and the S&P 500. High-low percent equals the number of stocks making new highs less the number of stocks making new lows divided by the total number of stocks in the SPDR. Showing net new highs as a percentage of the total allows chartists to compare and rank the values. In contrast to the actual price chart of the SPDR, high-low percent gives us an idea of what is happening inside the sector and how the components are acting. The table below shows a screen shot from the symbol catalog and the high-low percent indicators. The sector SPDRs are in the red box.
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Chart 1
Viewing the indicator ChartList in summary format allows chartists to sort by the indicator's value, which is the closing price. This makes it easy to determine which sectors have the highest high-low percent and which have the lowest high-low percent. The table below shows high-low percent for the Finance SPDR leading the way by a wide margin. Over 25% of the stock in this sector hit new highs on Monday. The HealthCare SPDR and the Industrials SPDR are in second and third place. Both are outperforming high-low percent for the S&P 500.
Chart 2
The Consumer Staples SPDR and Utilities SPDR are at the bottom of the list. These are defensive sectors that typically perform well when the market is risk averse. With the S&P 500 at or near a new high, the market is clearly in a long-term uptrend and embracing risk. High-low percent for the Materials SPDR (XLB) is also lagging with a reading of zero percent. Note that daily readings can be volatile and chartists may want to smooth these out with a ten or twenty period moving average, which is shown in the next chart.
SETTING A BULLISH-BEARISH THRESHOLD FOR HIGH-LOW PERCENT... High-low percent is a pretty straightforward indicator. The bulls have the edge when new highs outnumber new lows and high-low percent is positive. Conversely, the bears have the edge when new lows outnumber new highs and high-low percent is negative. Not every dip into negative territory is always bearish. If often helps to use bullish and bearish thresholds to qualify signals. Chart 3 shows high-low percent for the Finance SPDR. Despite two dips into negative territory, new highs have outnumbered new lows for most of the last six months. The two negative dips were brief and did not exceed five percent. As such, I added horizontal lines to this chart to create bullish and bearish thresholds. A dip below minus five percent would be deemed significant and warrant attention.
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Chart 3
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Chart 4
Chart 4 shows high-low percent for the Utilities SPDR ($XLUHLP). In contrast to high-low percent for the Finance SPDR, this indicator crossed the 5% thresholds four times (twice up and twice down). High-low percent showed some strength from mid October to mid November, but dipped below -5% in late November as selling pressure hit the sector. As with all indicators, chartists should also consult the actual price chart and other indicators for confirmation. High-low percent is just an indicator and should not be used for timing. Also note that the sector SPDRs are weighted by market cap, which means the top stocks carry the most weight. High-low percent, on the other hand, is an un-weighted indicator that values all components equally.
RANKING SECTORS AND ANALYZING ROTATION USING THE BPI... Chartists can also create a ChartList using the Bullish Percent Indices to rank the nine sectors and the S&P 500. The Bullish Percent Index measures the percentage of stocks on a Point & Figure buy signal, which is a double top breakout. It is a black and white indicator because a stock is either on a P&F buy signal or a P&F sell signal, which is a double bottom break down. Chart 5 shows Lennar (LEN) with a P&F sell signal in June 2013 (red 6) and a P&F buy signal in September 2013 (red 9). The numbers represent the start of each month. A, B and C are used for October, November and December. You can read more about the Bullish Percent Index in our ChartSchool article. The screen shot below shows a list of indicators related to the Bullish Percent Index.
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Chart 5
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Chart 6
INDUSTRIALS, MATERIALS AND FINANCE LEAD BPI TABLE... The image below shows a summary view of a ChartList based on the Bullish Percent Indices for the nine sectors and the S&P 500. It is sorted by the closing value to rank the sectors. This picture is a little different than the summary using high-low percent. Notice that the industrials, materials and finance sectors are the strongest with BPIs above 90%. The energy and utilities sectors are the weakest with BPIs below 75%. Even so, their BPIs are well above 50% and the majority of stocks are still on P&F buy signals.
Chart 7
