Emerging From The Correction The Best And Worst Looking Sectors
- General market thoughts
- Sectors under pressure
- Stronger looking sectors
General market thoughts
My thoughts on the recent correction is that we have likely seen the low, that more ranging action is likely, probably involving a test of that low, but that eventually US equities will see new bull market highs. Two points come to mind. First, everyone and his dog has come to the conclusion that volatility is on the rise, just as the 10-day ROC of the VIX has reached an all-time-high. Historically, peaks in this indicator have been separated by many months, which suggests that volatility, apart from a possible jump if we get the test of the low, will be relatively subdued for a while. Second, one of the characteristics of this bull market has been strong breadth. With interest rates on the rise and interest sensitive issues on the decline, breadth may be less robust going forward. If so, that will provide an early bird warning that under the hood the bull market is not so healthy. That’s not a prediction, merely a possibility to be on the lookout for.
Sectors under pressure
The following charts all present the same information, a weekly close and long-term KST of the price, and the same thing for the relative action versus the S&P Composite. Chart 1 looks at the Goldman Sachs Natural Resource ETF, a predominantly energy driven ETF. The price is currently just above two converging trend lines and the KST has gone flat. It’s obviously at a crucially important support juncture. However, what concerns me is the fact that this sector should be acting better at this mature stage in the business cycle. After all, this is the time when equities should be discounting firmer commodity prices. Moreover, the relative line, in the third window, is well below its 65-week EMA and edging below the two converging trend lines. Finally, the long-term KST for relative action is already in a bearish mode. Unless the relative performance turns around very quickly we could well see the absolute price break as well.
Chart 1
Chart 2 features the Spider Energy ETF, the XLE. In this instance the absolute price is still positive, but needing to rally immediately unless it is to avoid a clear-cut downside break. Here again, relative action is weighing on the technical position as it is below its 65-week EMA and has just violated a small up trend line.
Chart 2
Chart 3 shows that the Spider Consumer Staples (XLP) is also resting on a key support in the form of a long-term trend line. However, the bearish absolute KST and new secular low in relative action argue for an eventual breakdown.
Chart 3
Several other sectors have recently been under pressure due to their sensitivity to rising rates among other factors. These are utilities, telecom and REITS. The Dow Jones US Real Estate ETF, the IYR, is typical of other REIT ETF’s in that it is trading well below its 65-week EMA and its long-term KST is bearish. Relative action this week has tentatively edged to a new bear market low. Remember, that this chart is a total return one that takes account of dividends.
Chart 4
Stronger looking sectors
Technology may be overextended but the Spider Technology ETF, the XLK, continues in its persuasive uptrend. The recent correction, hardly made a dent in this strong sector. Relative action is also edging out a marginal new high. Given the two positive long-term KSTs new highs in this ETF look like a good probability.
Chart 5
Financials benefit from higher interest rates, and with bond charts looking bullish on a yield basis, it is not surprising that the Spider Financial ETF XLF, is looking strong technically. First, it is well above the red up trend line and 65-week EMA. Second, its KST is in a rising trend. Most important of all, is the fact that the RS line has just broken out from a consolidation pattern and the KST for relative action has begun to re-accelerate on the upside.
Chart 6
The most improved sector in the last few months is that of consumer cyclicals in the form of the Spider Cyclicals ETF, the XLY. The price has broken above an important resistance trend line. However, the relative line has just completed a broadening wedge, the boundaries of which have been flagged with the two diverging green trend lines. This is a very bullish pattern and gives credence to the recently minted buy signal from the relative KST in the bottom window.
Chart 7
Good luck and good charting,
Martin J. Pring
The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.
