FOUR RISK RATIOS FOR STOCKS, MAJOR INDEX ETF OVERVIEW, MATERIALS ETF HITS SUPPORT, ITB HOLDS FLAG BREAK, BOND BREAKOUTS AND RATE SENSITIVE ETFS, STOCKS TO WATCH, LIVE DEMO
FOUR RISK RATIOS FOR THE STOCK MARKET... The following charts are from today's Webinar (click here). Chartists can enhance their broad stock market analysis by adding indicators that measure risk appetite. Today I am going to show four stock-specific ratios that will give us an idea of the risk appetite in the stock market. A strong appetite for risk is positive because it reflects more confidence in the stock market. A weak appetite is negative because it indicates less confidence (risk aversion). Keep in mind that these are just indicators and they are meant to augment other analysis techniques, not serve as stand alone indicators to forecast the direction of the stock market. Also note that I am using four ratios to get a general idea for the risk environment and not relying on just one.
The first two ratios measure risk by comparing the S&P 500 Equal-Weight Index ($SPXEW) relative to the S&P 500 and the Russell 2000 to the S&P LargeCap 100. The S&P 500 Equal-Weight Index represents the average stock in the S&P 500 because it is an equal-weight index. In contrast, the S&P 500 represents large-caps because it is a market-cap weighted index. Beta is a measure of systematic risk, which means is general stock market risk associated with all stocks. Stocks with higher betas are deemed riskier than stocks with lower betas. Large-caps have lower betas than small and mid cap stocks, and are usually considered less riskier. This means the stock market has a stronger risk appetite when the S&P 500 Equal-Weight Index outperforms the S&P 500 and when the Russell 2000 outperforms the S&P LargeCap 100.
Chart 1 shows the $SPXEW:$SPX ratio with a big "V" reversal in October and an uptrend over the last few months. This means the S&P 500 Equal-Weight Index ($SPXEW) is outperforming the S&P 500 and this shows a healthy appetite for risk. Chart 2 shows the $RUT:$OEX ratio bottoming in mid October and moving higher the last five months. This tells us that small-caps are outperforming large-caps, which is positive for the market overall. It also tells us that we should prefer small-caps over large-caps right now.
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Chart 1
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Chart 2
The $COMPQ:$NYA ratio compares the performance of the Nasdaq to the NY Composite. There is pretty much zero overlap in these two indices. The Nasdaq is tech heavy because the technology sector weighs around 42.5%. The healthcare sector weighs around 17%, and most of the healthcare issues are biotech. The NY Composite is completely different. Finance is the biggest sector at 20.88%, oil & gas is second with 16.25% and consumer goods is third with 11.63%. The technology sector accounts for less than 5%. Thus, the appetite for risk is stronger when the Nasdaq outperforms the NY Composite. Chart 3 shows the $COMPQ:$NYA ratio rising since May 2014 and the Nasdaq is clearly stronger than the NY Composite. This shows a healthy appetite for risk. The sector percentages came from the Nasdaq and NYSE websites
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Chart 3
Chart 4 shows the RCD:RHS ratio, which measures the performance of the Equal-Weight Consumer Discretionary ETF (RCD) to the Equal-weight Consum Staples ETF (RHS). I am using the equal weight ETFs because I think these better reflect performance for the sector as a whole. The Consumer Discretionary SPDR and the Consumer Staples SPDR are market-cap weighted ETFs that reflect the performance of large-caps within the sector. In general, the risk appetite with healthy when the consumer discretionary sector outperforms the consumer staples sector. The consumer discretionary sector is the most economically sensitive sector and includes lots of retail stocks. Turning back to the chart, the RCD:RHS ratio broke down in early January, but reversed sharply in mid January and surged the last two months. Consumer discretionary is clearly outperforming consumer staples and this is positive for the stock market overall. And finally, note that all four ratios reflect a healthy risk appetite in the stock market and support the current uptrend.
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Chart 4
QQQ HOLDS BREAKOUT... Chart 5 shows the Nasdaq 100 ETF (QQQ) breaking out in mid February and this breakout zone turning into support in mid March. Notice that this is the third time in twelve months that broken resistance has turned into support and held. Chartists can now mark the first support level to watch in the 104-105 area.
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Chart 5
SPY, MDY AND IJR OVERVIEW... The next three charts show the S&P 500 SPDR (SPY), S&P MidCap SPDR (MDY) and S&P SmallCap iShares (IJR) with surges in October-November and rising channels the last few months. These rising channels define the current uptrend. The lower trend line and early March lows combine to mark support zones that hold the key to these uptrends. Breakdowns by two or more would be bearish for the market overall. Also notice that MDY and IJR show relative strength, which means small-caps and mid-caps are outperforming large-caps.
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Chart 6
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Chart 7
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Chart 8
XLB AND RTM HIT SUPPORT ZONES... The Materials SPDR (XLB) and Equal-weight Materials ETF (RTM) are at interesting junctures as they stall near support zones. Chart 9 shows XLB breaking out with a surge in February and falling back with a decline in March. This decline is viewed as a correction within a bigger uptrend because the ETF hit a 52-week high in February, which means the long-term trend is up. XLB is now in a support zone marked by broken resistance and the Fibonacci cluster. The gray Fibonacci Retracements Tool extends from the mid December low to the late February low and the 50% line is around 49. The blue Fibonacci Retracements Tool extends from the late January low to the same high and the 61.8% line is around 49 as well. The two lines "cluster" around 49 to confirm support here. The short-term trend is down though, and XLB shows relative weakness since late February. Look for a break above last week's high to reverse this downswing. Chart 10 shows the Equal-weight Materials ETF (RTM) with similar characteristics.
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Chart 9
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Chart 10
FLAG BREAKS FOR ITB AND XHB... The Home Construction iShares (ITB) and Home Builders SPDR (XHB) are showing signs of life with flag breakouts over the last few days. Chart 11 shows ITB hitting a new high in late February and pulling back with a falling flag into March. The ETF broke out of this bullish continuation pattern with a surge above 27.5 and this breakout is holding. The early March lows mark support in the 26.5-27 area. Chart 12 shows the Home Builders SPDR (XHB) with similar characteristics.
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Chart 11
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Chart 12
BOND BREAKOUTS AND RATE SENSITIVE ETF'S... Several bond ETFs made big moves again this week and extended their breakouts from last week. This means Treasury yields fell and falling yields could affect some interest-rate sensitive stocks, such as utilities and REITs. Chart 13 shows the 20+ YR T-Bond ETF (TLT) holding support in the 122-126 area and holding well above the November low. The ETF broke the upper trend line of the red Raff Regression Channel and exceeded the late February high last week (breakout). TLT built on this breakout with a close above 132 today. The indicator window shows the 30-YR Treasury Yield ($TYX) well below the falling 200-day SMA and in a long-term downtrend. The yield turned down the last two weeks and broke below its late February low.
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Chart 13
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Chart 14
Utilities and REITs are positively correlated with Treasuries and negatively correlated with Treasury yields. This means a decline in Treasury yields could benefit these two groups, even though they fell today. Chart 15 shows the Utilities SPDR (XLU) firming around the rising 200-day SMA in early March and surging above first resistance last week. The breakout is getting a test with today's decline, but I think the breakout is still valid. A close below 44 would argue for a reassessment. Chart 16 shows the REIT iShares (IYR) falling from 83 to 77 and retracing around 50% of its prior advance. The ETF reversed this slide with a surge above the Raff Regression Channel and early March high.
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Chart 15
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Chart 16
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