MICRO-CAPS LEAD MIXED MARKET, SMALL-CAP ETF AND QQQ HIT NEW HIGHS, EW S&P 500 CONTINUES TO LAG, TREND SORTING WITH THE PPO (DEMO), FOUR KEY SECTOR ETFS ARE STILL TRENDING UP, INDUSTRIALS BREAK DOWN, OIL WEIGHT ON ENERGY
MICRO-CAPS LEAD MIXED MARKET ... Link for today's video. The stock market is not clicking on all cylinders right now, but the majority of cylinders are still in uptrends, even after some selling pressure this month. Today I will look at some key uptrends and show what it would take to forge reversals. Of note, we saw new highs in the Nasdaq, Russell 2000, Consumer Discretionary Sector ETFs and Healthcare ETFs this week. Things can't be that bad when small-caps and the most economically sensitive sector are leading. PerfChart 1 shows the performance for nine major index ETFs over the past month. Note that this does not include Friday's price action. Six of the nine are down and down less than 2%. Three of the nine are up and up more than 2%. Notice that the S&P SmallCap iShares (IJR(, Russell 2000 iShares (IWM) and Russell MicroCap iShares (IWC) are leading this month.
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Chart 1
PerfChart 2 shows the nine equal-weight sector ETFs and the Equal-Weight S&P 500 ETF (red). Notice that the Equal-Weight Consumer Discretionary ETF (RCD) and Equal-weight Healthcare ETF (RYH) are the only two with gains over the past month. These two are the clear leaders this month. The energy and utilities ETFs are the weakest. The finance ETF (green) shows relative strength because it is down less than the Equal-Weight S&P 500 ETF (RSP).
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Chart 2
SMALL-CAP ETF AND QQQ HIT NEW HIGHS... Chart 3 shows the Nasdaq 100 ETF (QQQ) hitting a new high this week and in a clear uptrend since mid January. The green lines mark a Raff Regression Channel and the lower line marks support in the 105-106 area, which is confirmed by the lows from mid April and early May. The blue dotted lines within this uptrend mark three consolidations. The first occurred after the October-November surge. The current consolidation looks like an ascending triangle, which is a bullish continuation pattern. A close above 111 would trigger a breakout and signal a continuation higher. The indicator window shows the SCTR above 80 and this puts QQQ in the top 20% of our ETF universe (excluding inverse and leveraged ETFs).
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Chart 3
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Chart 4
Chart 4 shows the S&P SmallCap iShares (IJR) hitting a new high this week and extending its uptrend. Representing small-caps, this is one of the strongest ETFs in our universe with an SCTR near 90. With a new high, an uptrend and a strong SCTR, I see no reason to be bearish, or even negative, on small-caps right now. On the price chart, the green Raff Regression Channel defines the medium-term uptrend and the blue Raff Regression Channel defines the short-term uptrend. Short-term support is set at 118 and medium-term support at 114. Note that the trends for QQQ and IJR have been up since the surge and breakouts in October. Counting back to late October, this means the trends have been up for eight months now. You can read more about the Raff Regression Channel in our ChartSchool
EQUAL-WEIGHT S&P 500 ETF CONTINUES TO LAG... The S&P 500 SPDR (SPY) and Equal-Weight S&P 500 ETF (RSP) are still in uptrends, but both are lagging their small-cap peers and trading rather flat. Chart 5 shows SPY within a rising channel since December. To be consistent with QQQ and IJR above, I am going to mark key support in the 205-206 area (lower trend line and May-June lows). Note that SPY has been within a 5% range since March and crossed the 207.5 level a dozen times. Trading is definitely choppy and boring, but I think the drift is up as long as 205 holds on a closing basis. The indicator window shows the PPO (10,75,1) in positive territory since late October. A move below zero would indicate that the 10-day EMA crossed below the 75-day EMA. There is no magic to the settings and there has been no attempt to optimize. A 10-day EMA filters out the daily fluctuations and noise. A 75-day EMA covers 3 1/2 months of price action for a medium-term perspective.
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Chart 5
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Chart 6
Chart 6 shows the Equal-Weight S&P 500 ETF (RSP), which is one of the weakest of the major index ETFs with an SCTR around 57. As with SPY, RSP has been flat since March and traded in a tight 5% range. The overall trend is still up because RSP remains above first support in the 80-80.5 area. Momentum has clearly weakened as the PPO(10,75,1) turned negative in early June and RSP formed a lower high this month. A follow through break below support would reverse the uptrend on this chart. While a break would be negative for the market, I would not turn bearish on stocks in general unless we see confirming support breaks by the other index ETFs shown above.
TREND SORTING WITH THE PERCENTAGE PRICE OSCILLATOR... The nine S&P 500 sectors come in two flavors: cap-weighted SPDRs and equal-weight (EW) ETFs (18 in total). As the name implies, the cap-weighted SPDRs are driven by large-cap stocks and usually the top ten stocks account for over 50% of the weighting. The equal-weight sector ETFs weigh their holdings equally and this provides a better representation for the sector as a whole. As market-cap weighted ETFs, the SPDRs are good for breaking down the cap-weighted S&P 500.
Today I am going to show some sector charts with the PPO (10,75,1) and the respective EMAs on the price chart. Basically, the trend is up when the 10-day EMA is above the 75-day EMA and the PPO is positive. The trend is down when the 10-day EMA is below the 75-day EMA and the PPO is negative. It is not a perfect system, but it will usually keep one on the right side of the trend. Moreover, it adds a mechanical aspect to the decision making process because the indicator is either bullish or bearish. There is no in between. You can read more about the PPO in our ChartSchool.
Chart 7 shows a simple scan using the PPO(10,75,1) and the "Rank by" function. This means the scan results will be ranked by the indicator value, which is the PPO(10,75,1). Positive PPOs suggest an uptrend at work. Negative PPOs suggest a downtrend. I am also showing the SCTRs for reference. First, notice that 11 of the 18 sector ETFs have positive PPOs. This is net bullish for the stock market. Second, notice that healthcare and consumer discretionary are the clear leaders right now with four of the five highest PPO values (and four of the five highest SCTR values). Third, notice that industrials, energy and utilities have negative PPOs and these three are the weakest sectors, by far.
Chart 7
MAJORITY OF SECTOR ETFS ARE TRENDING UP... The next four charts show the four strongest equal-weight sector ETFs and the PPO(10,75,1). These four are in uptrends and represent around 60% of the S&P 500 SPDR and 57% of the Equal-Weight S&P 500 ETF. These are the four to watch for signs of a break down in the broader market. The green shadings mark key support zones.
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Chart 8
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Chart 9
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Chart 10
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Chart 11
INDUSTRIALS ETFS BREAK DOWN... Chart 12 shows the Industrials SPDR (XLI) with a negative PPO(10,75,1) and a break below the triangle trend line on Thursday. The close below 55 is the lowest close since February 2nd and this is a bearish development. XLI is in a downtrend with resistance marked at 57. Chart 13 shows the Equal-weight Industrials ETF (RGI) with similar characteristics. Note that railroads and airlines are part of the industrials sector.
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Chart 12
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Chart 13
OIL CONTINUES LOWER... Before looking at energy, let's review the immediate downtrends in oil. Chart 14 shows the USO Oil Fund (USO) in the main window and August Light Crude (^CLQ15) in the lower window. I thought bull flags were taking shape in late May and early June, but these flags overstayed their welcome as prices extended lower. Upside breakouts were required for confirmation. Barring a breakout, the immediate trend is down and we could see a move towards the lower trend line. Notice that USO broke short-term support today. Chart 15 shows the US Brent Oil ETF (BNO) and August Brent (BQ15) with similar characteristics.
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Chart 14
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Chart 15
ENERGY ETFS EXTEND DOWNTRENDS... Chart 16 shows the Equal-weight Energy ETF (RYE) breaking upswing support in late May and continuing below the channel trend line this week. The pink dotted line is the 10-day EMA, the blue line is the 75-day EMA and the PPO(10,75,1) is shown in the indicator window. This chart is where "art" and "science" meet for technical analysis. RYE hit new lows in October, December and January, which means the long-term trend is down. Even though PPO(10,75,1) turned positive from early April to late May, the bounce from mid January to early May was viewed as a correction within a bigger downtrend. That is the "art" or subjective part. The science part is now back in sync because the PPO is negative and XLE is in a clear downtrend. Chart 17 shows the Oil & Gas Equip & Services SPDR (XES) with the PPO(10,75,1) moving back into negative territory the last two weeks.
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Chart 16
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Chart 17
VIDEO DETAILS... Link for today's video.
