TRACKING 10 KEY INDUSTRY GROUP ETF'S -- BANKS POINT SOUTHWEST AS HOMEBUILDERS POINT NORTHEAST -- ENERGY SHARES LEAD MARKET LOWER -- FINANCE SPDR FILLS A PAIR OF GAPS -- REGIONAL BANKS WEIGH ON FINANCE SECTOR -- 5-YR YIELD AND STOCK MARKET CORRELATION

TRACKING 10 KEY INDUSTRY GROUP ETF'S... Link for today's video. PerfChart 1 shows year-to-date performance for 10 ETFs that represent different groups in the stock market. I normally use the Oil & Gas Equipment & Services SPDR (XES) and the Metals & Mining SPDR (XME) on these PerfCharts, but these two are incredibly weak so I substituted the Utilities SPDR (XLU) and Telecom iShares (IYZ). In other words, XES and XME are off my radar right now and I am not even considering bullish scenarios for these two.

Based on these ten ETFs, the overall picture is mixed with five up and five down (as of Friday's close). The S&P 500 was down around .65% for this timeframe and this jibes with this industry group picture (mixed-to-weak). The Biotech SPDR (XBI), REIT iShares (IYR) and Home Construction iShares (ITB) are the leaders this year**, while the Regional Bank SPDR (KRE), Internet ETF (FDN) and Transport iShares (IYT) are the laggards. We can blame Google and Amazon for relative weakness in FDN.

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Chart 1

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Chart 2

To put this year's performance into perspective, PerfChart 2 shows performance for these same ten ETFs in 2014 (2-Jan-2014 to 2-Jan-2015). Notice that all ten were up with Retailers, REITs, Semis, Biotechs, Utilities and Transports leading. In contrast, homebuilders (blue), Regional banks (green), internet (black) and telecom (orange) struggled last year.

BANKS POINT SOUTHWEST AS HOMEBUILDERS POINT NORTHEAST... Chart 3 shows a weekly Relative Rotation Graph (RRG) for these same ten ETFs. The weekly RRG shows performance relative to SPY, which is the benchmark. First, notice that seven of the ten show relative strength (outperformance). Second, notice that biotechs, homebuilders, utilities and semis are the strongest. Regional banks, internet and telecom are the weakest.

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Chart 3

Chart 4 shows a daily RRG for a short-term perspective. Notice that biotechs, utilities, homebuilders, REITs and retailers are leading because they are in the green quadrant. In contrast, transports, internet and banks are lagging because they are in the red quadrant. There are also two arrows on the chart. The blue arrow points northeast and this corresponds with ITB, IYR and XRT. This means that these three ETFs show relative strength and the momentum of relative strength is improving. The x-axis (horizontal) measures relative performance and the y-axis (vertical) measures the momentum of relative performance. In contrast, notice that the RRG line for KRE is moving southwest. This means the ETF shows relative weakness and the momentum of relative weakness is increasing, which is double bearish.

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Chart 4

ENERGY SHARES LEAD MARKET LOWER... The Energy SPDR (XLE) was the worst performing sector in 2014 and it is currently the worst performing sector in 2015. The energy woes continued today as XLE, the Oil & Gas Equip & Services SPDR (XES) and the Oil & Gas E&P SPDR (XOP) led the market lower. Chart 5 shows XLE reversing in the 50-62% retracement zone in late December and moving sharply lower this year. Notice that RSI has been between 10 and 60 since July, which is typical for RSI during a downtrend. A break above 60 would provide the first sign that momentum is reversing.

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Chart 5

Chart 6 shows XOP poised to break below its mid December low and the indicator window shows XOP underperforming XLE. The stocks in XOP are much less diversified than the major integrated oil companies that dominate XLE. This is why XOP is getting hit harder. Chart 7 shows XES breaking below its mid December low and showing even more relative weakness. The demand for equipment and services is clearly tied to the price of oil.

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Chart 6

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Chart 7

FINANCE SPDR FILLS A PAIR OF GAPS... Chart 8 shows the Finance SPDR (XLF) surging above 25.25 with a gap on Thursday and filling this gap with a decline on Friday-Monday. This is the second gap in as many months that has been filled. The red arrows show the 18-Dec gap and the 8-Jan gap. Even though XLF moved to a new high in late December, the early January decline pushed the ETF below the first gap. XLF bounced last week to affirm support in the 23.5-23.75 area, but this bounce is suddenly looking weak with the decline back below 24. The December-January lows mark a clear support zone in the 23.5-23.75 area and I am watching this level closely. A close below 23.5 would be negative and signal a correction within the bigger uptrend. Yes, I would still consider the 11 month trend to be up.

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Chart 8

REGIONAL BANKS WEIGH ON FINANCE SECTOR... Chart 9 shows the Regional Bank SPDR (KRE) failing to hold a flag breakout in late December and moving below its December lows this year. Admittedly, I was bullish on KRE because it broke out in early November, consolidated into mid December and broke out again in late December. These breakouts have been negated because KRE plunged below 38. KRE shows relative "chart" weakness because it is below the mid December low and SPY remains above its mid December low. Before getting too bearish, note that volatility has been high since mid November and the ETF is short-term oversold after a sharp decline the last three weeks.

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Chart 9

5-YR YIELD AND STOCK MARKET CORRELATION... Money continues to move into Treasuries and this shows risk-aversion in the market. Chart 10 shows the 5-year Treasury Yield ($FVX) with a failed breakout in late December and a break down here in January. In fact, this chart looks quite similar to the KRE chart since mid November. Because Treasury yields move opposite of Treasury prices, the sharp move lower means money is moving into Treasury bonds. Money meant for the bond market is money that will not be available for the stock market.

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Chart 10

The indicator windows show two correlations. The first window shows the correlation between the 5-year T-yield and the S&P 500. The second window shows the correlation between the 5-year T-yield and the Regional Bank SPDR. For the most part, the S&P 500 is positively correlated with the 5-year T-yield. A positive correlation means they both move in the same direction. This positive correlation is even stronger when measured against KRE. There were only two dips into negative territory over the last 11 months and these dips did not last long. The break down in the 5-year Treasury Yield, therefore, is negative for regional banks and negative for the stock market. Chart 11 shows the 10-YR Treasury Yield ($TNX) moving below 2% again and nearing the October low. John Murphy noted last week that global deflationary pressures were pushing yields lower.

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Chart 11

WEBINAR ON TUESDAY AT 1PM ET... Tomorrow's Webinar will focus on the Home Construction iShares (ITB) and we will look at some individual stocks within the group. In addition, I will show some seasonal patterns that are taking shape over the next couple of months. You can register on the What's New blog page.