SPY HOLDS UPTREND, SECTOR SPLIT DEFINES RANGE, REVIEWING 2007 TOP, SECTOR BREADTH IN 2007-2008, SECTOR BREADTH IN 2015, HEALTHCARE PROVIDERS ETF CORRECTS, SOFTWARE ETF CONSOLIDATES, AIRLINES TRY TO TAKE OFF
SPY UPTREND CONTINUES TO HOLD... Link for today's video. By now we are all aware of deteriorating breadth on the NYSE and relative weakness in small-caps. We are also well aware of the trading range for the S&P 500 since March. The trading ranges for the S&P 500 SPDR (SPY) and Equal-Weight S&P 500 ETF (RSP) can be attributed to a split in sector performance since March. Chartists looking for a resolution to this trading range should watch the sectors for clues. In particular, breakdowns in the strong sectors would tilt the balance of power to the bears.
Even though RSP and SPY have gone nowhere since March, they have not gone down much and they have not broken support. In fact, RSP hit a 52-week high in May and SPY hit a 52-week high in July, and neither is far from its high. Chart 1 shows RSP trading in the top half of its 2015 range. Notice that the 5-week EMA is above the rising 52-week EMA. Even though RSP is underperforming SPY, the cup is half full (bullish) as long as RSP holds 78 on a closing basis. Chart 2 shows SPY with key support marked at 203 on the weekly chart.
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Chart 1
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Chart 2
SECTOR SPLIT DEFINES TRADING RANGE... PerfChart 3 shows the performance for the nine equal-weight sector ETFs and RSP since February 27th. RSP, the benchmark, is down a little over 1%. The consumer discretionary, finance, healthcare and consumer staples are up since February 27th (leaders). The technology, industrials, materials, energy and utilities sectors are down (laggards). Note that materials and energy are down much more than the others, and clearly the weakest. These outsized declines weighed on RSP and countered the gains in the other sectors.
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Chart 3
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Chart 4
PerfChart 4 shows the performance for SPY and the nine sector SPDRs, which are weighted by market capitalization. SPY is up around 1% since February 27th, four sectors are up, four are down and one is unchanged (technology). As with the equal-weight sectors, the consumer discretionary, finance, healthcare and consumer staples sectors are leading (and up). Even though weakness in materials, energy and industrials is a concern, I think this is offset with relative strength in consumer discretionary, finance and healthcare. A bear market is highly unlikely as long as the consumer discretionary and finance sectors hold up well.
REVIEWING THE 2007 PEAK AND BREAK DOWN... At the risk of beating this breadth thing to death, I thought it might be helpful to look at S&P sector breadth in 2007 and compare it to the current situation. Chart 5 shows the S&P 500 from March 2007 to February 2008. First, note that the S&P 500 peaked in October 2007 and broke a major support level in January 2008. Second, note that the sector weightings were different in 2007. In particular, the finance sector was the biggest sector prior to the peak and weighed around 22%. Other weightings include: technology + telecom (~18%), healthcare (~12%), industrials (~11%), consumer discretionary (~10.5%), consumer staples (~9%). Finance was clear the most important sector to watch. Chart 5 shows the 2007 peak for reference. Notice that the 20-day EMA crossed below the 120-day EMA for the second time in three months in November. This cross is also shown with the PPO(20,120,1) in the indicator window. The S&P 500 went on to break a major support level in January.
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Chart 5
SECTOR BREADTH IN 2007-2008... So what was happening with sector breadth in 2007? Chart 6 shows the AD Lines for the S&P 500 and the nine sectors from January 2007 until June 2008. The pink line is the 200-day moving average for reference. Note that the AD Lines for finance, consumer discretionary and healthcare peaked in May-June 2007, which was four to five months before the S&P 500 peaked in October. The S&P 500 AD Line also peaked in June and formed a sizable bearish divergence from June to October. Finance, consumer discretionary and healthcare were to blame for deteriorating breadth in the S&P 500. The AD Lines for Tech-Telco and Industrials peaked with the market in October and the AD Line for consumer staples peaked later in December. By January, eight of the nine AD Lines were below their 200-day moving averages and the bear market was on. The energy AD Line was the only one to continue its uptrend.
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Chart 6
SECTOR BREADTH IN 2015... Flash forward to 2015 and we can see that the AD Line for the S&P 500 has flattened since March (surprise, surprise). Note that the AD Lines for the consumer discretionary, finance and healthcare sectors hit new highs in July and these three sectors account for 45% of the S&P 500. Weakness in breadth started in February when the AD Lines for the industrials, consumer staples, utilities and materials sectors peaked. The Tech-Telco AD Line peaked in early March. Also note that the AD Line for the energy sector peaked in July 2014. Thus, one could argue that the AD Lines representing 55% of the market are trending lower right now. Also notice that four AD Lines are battling their 200-day moving averages (tech, industrials, staples, utilities).
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Chart 7
HEALTHCARE PROVIDERS ETF CORRECTS WITHIN UPTREND... The HealthCare SPDR (XLV) has been one of the strongest sectors this year with several sub-groups hitting new highs this month. The Biotech SPDR (XBI), Medical Devices ETF (IHI) and Pharmaceuticals ETF (PJP) all hit new highs in July. The HealthCare Providers ETF (IHF) is also in an uptrend, but the ETF corrected in July and did not hit a new high. This situation makes IHF an "ETF of interest". Just in case you missed it, here are the three reasons: strong sector, overall uptrend, correction within uptrend. Chart 8 shows IHI pulling back to support with a falling wedge. Broken resistance, the late May-early June lows and December trend line mark support here. The ETF is getting a bounce the last three days and is poised to challenge the wedge trend line.
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Chart 8
SOFTWARE ETF CONTINUES STRONG... The Software iShares (IGV) continues to stand out within the technology sector. Chart 9 shows IGV with an inverse head-and-shoulders pattern taking shape the last two months. Notice the resistance zone around 103, the left shoulder in early June and the head in early July. The right shoulder could be under construction here and a breakout would signal a continuation of the uptrend. The indicator window shows the StockCharts Technical Rank (SCTR) above 90 and this means IGV is one of the strongest industry group ETFs right now.
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Chart 9
AIRLINES TRYING TO TAKE OFF ... John Murphy noted a bounce in the Dow Transports in Thursday's Market Message and his note prompted me to revisit the airline group, which is still trying to get a breakout going. Chart 10 shows the DJ US Airline Index ($DJUSAR) with a small double bottom in June-July. The index attempted a breakout with the surge above 240 last week, but fell back below the resistance zone almost immediately. I am still looking for a close above 233 to complete the breakout here. The pink dashed line shows the 20-day EMA turning up and moving towards the 120-day EMA (blue). A cross above the 120-day EMA would be bullish for the six month trend. The indicator window shows the Airline ETF (JETS) also failing to hold its resistance breakout last week. I would look for a close above 24 to revive the breakout.
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Chart 10
VIDEO DETAILS... Link for today's video.
