UNIQUE SECTOR BREADTH INDICATORS, LONG-TERM VERSUS MEDIUM-TERM, SECTOR TRENDS, FINANCE AND HEALTHCARE TOP RANKS, ENERGY AND UTILITIES SEE RED, INDUSTRIALS SECTOR RANKS THIRD
SLICING AND DICING THE SECTORS WITH UNIQUE INDICATORS... Link for today's video.. As promised, I am showing a breadth and trend table for the nine sectors today. Using the unique indicators available at StockCharts, chartists can slice and dice a sector by analyzing sector-specific breadth indicators, the cap-weighted sector SPDR and the equal-weight sector ETF. This weight-of-the-evidence-approach can be used to establish a bullish or bearish bias and rank the sectors. Chart 1 shows a sampling of breadth indicators in the symbol catalog.
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Chart 1
Before looking at the table, let's break down the indicator groups for each sector. There are two long-term indicators, three medium-term indicators, two trend indicators and an overbought-oversold indicator. Note that I am using bullish and bearish thresholds for signals on these indicators. For example, the percentage of stocks above the 50-day EMA is technically bullish when more than 50% are above their 50-day EMA. Using centerline crossovers for signals will increase whipsaws so I opted for bullish and bearish thresholds just above or below the centerline to reduce whipsaws. There is no optimization at work here. I am simply trying to determine if the bulls or bears have the edge. Once an indicator turns bullish, it remains bullish until there is a bearish signal. An indicator, therefore, is either bullish or bearish. There is no in between.
LONG-TERM BREADTH INDICATORS... There are two long-term indicators. First, the %Above 200-day EMA tells us the percentage of stocks in the sector that are above their 200-day EMAs. A move above 60% is bullish (green arrows) until countered with a move below 40% (red arrows), which is bearish. I am using these bullish-bearish thresholds to reduce whipsaws. Second, High-Low Percent is the percentage of Net New Highs in the sector. Net New Highs equals new highs less new lows. High-Low Percent is bullish on a break above +5% and remains bullish until a move below -5%. Chart 2 shows the Materials SPDR with these two indicators. Notice that Materials High-Low Percent ($XLBHLP) moved above +5% and below -5% several times from October to January. Whipsaws do happen, but this indicator has been bullish since January 30th. The Materials %Above 200-day EMA (!GT200XLB) is more stable because it turned bullish on October 21st and remains bullish.
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Chart 2
MEDIUM-TERM BREADTH INDICATORS... There are three medium-term indicators and these indicators are more sensitive than the long-term indicators. The 60-day EMA of AD Percent is bullish when it breaks above +3% and remains bullish until a move below -3%. The 60-day EMA of AD Volume Percent uses the same signals. The %Above 50-day EMA is bullish on a break above 70% and remains bullish until a break below 30%, which is bearish. Chart 3 uses the Materials SPDR again. This is not the best example because these indicators have been quite erratic over the last nine months, but this is the reality sometimes. AD Percent triggered five times, AD Volume Percent triggered six times and the %Above 50-day EMA triggered four times.
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Chart 3
SECTOR TREND IDENTIFICATION... The trend indicators are used for the cap-weighted sector SPDR and the equal-weight sector ETF. Both are used to define the "sector" trend because the goal is trend identification for the sector as a whole. An uptrend is present when the 25-day EMA is above the 125-day EMA. A downtrend is present when the 25-day EMA is below the 125-day EMA. As far as the sector table is concern, the "sector" trend is up when both are in uptrends and these uptrends remain until both move into downtrends. In other words, one can move into a downtrend, but I will not classify the sector trend as down until both are in downtrends. Chart 4 shows the Materials SPDR (XLB) with the 25-day EMA crossing below the 125-day EMA in December and January. The Equal-weight Materials ETF (RTM) did not confirm because the 25-day EMA remained above the 125-day EMA throughout. The sector trend will reverse when the 25-day EMAs for both ETFs move below their respective 125-day EMAs.
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Chart 4
FINANCE SECTOR REMAINS STRONG... Chart 5 shows the Finance SPDR (XLF) with five breadth indicators, the Equal-weight Finance ETF (RYF) and the Finance %Above 20-day EMA (!GT20XLF). The two long-term indicators have been bullish since October 22nd, which is when Finance High-Low Percent ($XLFHLP) broke above +5%. Note that the Finance %Above 200-day EMA (!GT200XLF) indicator has been in bull mode since June 12th, 2012. Yes, 2012. Also notice that the "sector" trend has been up since July 6th, 2012. This is when the 25-day EMAs for the Finance SPDR (XLF) and the Equal-weight Finance ETF (RYF) were above their respective 125-day EMAs. How's that for a steady uptrend?!
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Chart 5
Two of the three medium-term finance indicators have been bullish since February 6th and all three have been bullish since April 13th, which is when the 60-day EMA of AD Volume Percent moved above +3%. The Finance %Above 20-day EMA (!GT20XLF) is shown at the bottom. This is a short-term indicator used to look for oversold conditions when the weight of the evidence is bullish and overbought conditions when the weight of the evidence is bearish. The last oversold reading was on April 21st. This signaled that the finance sector experienced some sort of correction within the bigger uptrend.
THE TREND-FOLLOWING MANIFESTO... Here is the thing about trends, and trend-following. As this finance chart stands right now, all five indicators are in bull mode and the "sector" trend is up. Note that XLF hit a new high Monday and RYF is within a half percent of its March high. Right now is what counts most for trend following. I do not know how long the indicators will remain bullish or how long the uptrend will extend. It will end when it ends. I am, however, confident that there will be bearish signals to tell me when the weight of the evidence has shifted from the bulls to the bears. As long as the evidence for the finance sector is bullish, I will look for bullish setups within the sector and treat short-term pullbacks as mere corrections within a bigger uptrend.
INDUSTRIALS SHOW STRENGTH ON SECTOR TABLE... Chart 6 shows the sector table with a rough ranking. Finance and healthcare are by far the strongest because all indicators are green. Note that the HealthCare SPDR (XLV) and Equal-weight Healthcare ETF (RYH) are both hitting new highs on Monday. The industrials sector is in third place, which is a bit of a surprise. Note that the Industrials SPDR (XLI) and the Equal-weight Industrials ETF (RGI) are bouncing off support over the last few days. The technology and materials sectors are in fourth and fifth place because two of the three medium-term indicators are bearish. Overall, four of the six indicators are still bullish and I remain bullish on both sectors. The consumer discretionary and consumer staples sectors are in sixth and seventh place because all three medium-term indicators are bearish. Perhaps this is just a correction because the long-term indicators are still bullish and the sector trends are up. Note that the Consumer Discretionary SPDR (XLY) and the Equal-Weight Consumer Discretionary ETF (RCD) hit new highs on Monday. And finally, the energy and utilities sectors are full blown bearish. All indicators are red and the sector trends are down.
Chart 6
VIDEO DETAILS... Link for today's video.
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Chart 7
ALL NINE SECTOR BREADTH CHARTS...
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Chart 8
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Chart 9
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Chart 10
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Chart 11
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Chart 12
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Chart 13
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Chart 14
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Chart 15
