FOUR WAYS TO MEASURE RELATIVE PERFORMANCE -- UTILITIES SECTOR MAINTAINS WEDGE BREAKOUT -- SMALL FINANCIALS SHOW RELATIVE STRENGTH -- FINDING SECTORS THAT POINT NORTHEAST -- AVOIDING SECTORS THAT POINT SOUTHWEST
SPX TESTS A KEY MOVING AVERAGE... Link for today's video. Selling pressure and volatility have dominated October, but some sectors and industry groups are holding up better than others. How can we find the strong groups and avoid the weak? The next few charts will show four methods for measuring relative performance. First, chartists can simply compare the price chart against that of the S&P 500 or another bench market index. The S&P Small-Cap 600 and S&P MidCap 400 broke below their August low and chart 1 shows the S&P 500 near its August low. Also note that the S&P 500 is near its rising 200-day moving average, which puts it at a possible inflection point.
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Chart 1
FOUR WAYS TO MEASURE RELATIVE PERFORMANCE... When comparing to the S&P 500, any stock, ETF or index that is above its August low is holding up better than the broader market. The further above this low, the better it is holding up. This is another way of saying relative strength. Chart 2 shows the Consumer Staples SPDR (XLP) breaking out to new highs in the latter part of September and the last week. This chart is clearly stronger than the S&P 500 because it is not anywhere near its August low.
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Chart 2
In addition to comparing relative price levels, chartists can also use the price relative, the StockCharts Technical Rank (SCTR) and the Relative Rotation Graph (RRG) indicators to measure relative performance. The first indicator shows the price relative (XLP:SPY ratio) breaking out in late September and surging to a new high. The second indicator shows the SCTR moving higher in September and exceeding 90 in October. The third window shows the JdK RS-Ratio Line (red) turning positive in mid September. This line measures the trend for relative performance and a move into positive territory shows a potential uptrend in relative strength. The green line measures the momentum of the relative strength line. Here are links to the ChartSchool articles on Relative Rotation Graphs (here) and the StockCharts Technical Rank (here).
Chart 3 shows the HealthCare SPDR (XLV) hitting a new high in September and pulling back the last few weeks. The ETF shows relative strength overall, but could correct to the 62 area. Notice that the price relative hit a new high this month, the SCTR has been above 70 since mid August and the JdK RS-Ratio Line has been mostly positive since late June.
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Chart 3
UTILITIES SECTOR MAINTAINS WEDGE BREAKOUT... Chart 4 shows the Utilities SPDR (XLU) holding well above its August low in September and breaking wedge resistance with a surge above 42 in early October. Also notice how the price relative (XLU:SPY ratio) and JdK RS-Ratio Line broke out in early October for confirmation. The StockCharts Technical Rank (SCTR) confirms relative strength because it has been above 50 since late August.
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Chart 4
SMALL FINANCIALS SHOW RELATIVE STRENGTH... The three sectors above are considered the defensive sectors because the companies in these sectors are less sensitive to changes in the economy. No matter what happens to the economy, we still need electricity, water, toothpaste, soap, medicine and health services. Chart 5 shows the Finance SPDR (XLF) in corrective mode as the relative performance indicators show relative strength. I am assuming this is a correction because the ETF hit a new high in mid September and remains above its early August low. I am watching XLF closely because all three relative performance indicators show relative strength in XLF. The price relative broke out in late August and the SCTR has been above 50 since mid August. The JdK RS-Ratio Line has been positive since late August. Chart 6 shows the Equal-Weight Consumer Discretionary ETF (RCD) with the price relative breaking out over the last two days. Chart 7 shows the SmallCap Financials ETF (PSCF) firming in October and surging towards short-term resistance over the last two days.
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Chart 5
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Chart 6
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Chart 7
FINDING SECTORS THAT POINT NORTHEAST ... Mathew Verdouw of Market Analyst gave a presentation at the IFTA conference in London and showed an easy way to distinguish the leaders from the laggards using Relative Rotation Graphs (RRG). Mathew noted that the actual quadrant is not as important as the direction of the line. In general, a line pointing northeast means relative performance is improving and a line pointing southwest means relative performance is deteriorating This simple approach makes it easy to quickly see which sectors have potential to outperform and which do not. Chart 8 shows a Sector SPDR Relative Rotation Graph with four lines pointing northeast. These four sectors are also the four sector SPDRs that I featured above. Note that chartists can add or remove the RRG lines by checking or unchecking the boxes below.
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Chart 8
AVOIDING SECTORS THAT POINT SOUTHWEST... Chart 9 shows the other five sectors, and these five are clearly not showing relative strength. XLE is pointing due southwest and the weakest of all nine sectors. XLK did a u-turn from northeast to south-southwest over the last four weeks. XLI turned up over the last six weeks, but has not yet turned east and cannot be considered a leader. XLB turned down and is pointing southwest over the last three weeks. Last, but certainly not least, XLY has been drifting east-southeast over the last ten weeks. The ETF is not as negative as the others, but is clearly not pointing northeast yet.
