Week 20 SPX Sectors Trending and Performance
The major markets improved their trending as we saw in the note from yesterday. Other than the Dow Jones all the indices are trending short-term bullish. Moreover, the S&P 500, NASDAQ and NASDAQ 100 are all trending perfectly bullish. We know though that markets do not go up or down in a straight line. They create trends and these trends are created by underlying components of the market. The 11 SPX sectors are the next level of underlying components that I believe provide a deeper assessment of what is working and what is not.
Summary
There are 3 sectors that are keeping the S&P 500 trending bullish. These are the usual suspects of XLK, XLC and XLY. Note that each of these 3 sectors have (at least) 2 big tech stocks propping them up. XLK has AAPL and MSFT, XLC has META and GOOGL and XLY has AMZN and TSLA.
All these 3 sectors look toppy and overbought to me. That does not mean they will drop immediately. It means that the upside seems limited and, if I had to place a trade it would be to the downside.
I have shortlisted 3 sectors for potential trades: XLU, XLB, XLRE. Read below for details. I will decide Monday morning if I plan to trade any of these.
Note that I have changed the chart section to a commentary and added a new section for weekly expected price ranges.
Trending Heat Map
We can see that there was some improvement in a few sectors. However, there were no trend reversals. In fact, XLP turned short-term bearish from being short-term bullish. (Note that trend reversals in my system are when there is a change in the 3rd or the 6th-colored cell in the above picture. That is either a reversal in the 10/20 day moving average or the 50/200 day moving average). So, we have
Perfectly Bullish (2): XLK, XLC
Short-term Bullish (1): XLY
Perfectly Bearish (5): XLU, XLRE, XLV, XLE, XLF
Short-term Bearish (3): XLI, XLP, XLB
So, 8 out of 11 sectors are still trending bearish per my system. And we have the usual suspects such as XLK, XLC and XLY carrying the load for the markets. WE do see some improvement in the trending of the bearish sectors such as XLI, XLF, XLE and XLB. So, we have to see if this improvement ultimately ends up in reversing their trend.
Performance
Looking at the May numbers, one might say that this over performance by just 3 sectors that have the big tech stocks as big components under them has to stop at some point. But that would be hope. The fact is that these 3 sectors have over performed the other sectors for more than 5 months now. There is a famous saying that the market can be irrational much longer than one can stay solvent. That is why I play the price and not the sentiments. Sentiments have a way of changing based on price.
Having said all the above, I am not sure if anyone is putting new money into those sectors or the stocks that have driven those sectors. One can look at the charts and decide what are the probabilities of the next moves. Instead of plotting the charts here, I prefer to provide some commentary on what I see in the charts. I will go from the best performing/trending to the worst as of now.
Chart Observations
XLC: Looks over-extended well beyond my guideline of the 150-day moving average. The RSI is on the higher side and price is at top end of the BB (Bollinger Bands). Hold/Sell or at least sell upside calls if one owns it. There is a very small unfilled gap at 57.12 (which is -6.98% below current levels).
XLK: Looks over-extended well beyond my guideline of the 150-day moving average. The RSI is on the higher side and price is at top end of the BB (Bollinger Bands). Hold/Sell or at least sell upside calls if one owns it. There is a very small unfilled gap at 148.52 (which is -5.69% below current levels).
XLY: Still looks good from purely a chart perspective. Does not look overextended. One has to give some consideration to the fact that this is “consumer discretionary” and over-weighted by AMZN and TSLA. So, the performance could be misleading especially when we are seeing the consumer slowing down somewhat. The RSI and BB indicating somewhat overbought though. No recommendations on this one. There are 2 unfilled gaps one above (at +9.13% above current levels) and one below (at -6.17% below current levels).
XLP: There is a big overhead resistance at the 77.5 level which has been a resistance 4 out of the last 5 times. The current price is only 2% below that so the upside seems limited for now. I would wait for price to take out that resistance level before going long (if one is so inclined, I am not). The trending worsened recently as we can see from the trending heat map above. No recommendations. There are 2 unfilled gaps below with the first one -2.15% below current levels.
XLV: Trending is not encouraging although the RSI and BB are closer to oversold levels. The Biotech sector (XBI) which is an underlying component of this sector is trending bullish. So, there could be some upside especially because healthcare is considered a defensive sector. One could play a small speculative trade to the upside. I am not going to as I do not have enough conviction and it does not meet my trend criteria. There is an unfilled gap below which is -2.42% below current price.
XLI: The price checked back to the 150-day moving average and bounced off it. The trending is improving although not yet short-term bullish. Looks a bit more promising than the other sectors. I am going to watch the price action next few days and see if it makes sense to put on a trade to the long side. There are no near-term unfilled gaps (through 1 year of observation).
XLU: Price literally fell off a cliff for whatever reason. The trending remains very bad. There is a support level which is -3.69% below current levels. I do not see how the price avoids getting to that level before making any attempt to bounce back. So, going short XLU is a trade I will consider (in my shortlist of trades). The only negative is that the RSI and BB are indicating oversold levels already.
XLB: It looks interesting to the upside. The trending is just starting to get better although it has not hit my bullish requirements. The price is making a good attempt to check back to its 150-day moving average. Also, there are 3 unfilled gaps above with the first one at +2.20% and the next one at +5.66% above current levels. Going long XLB is a trade I will consider (in my shortlist of trades). The RSI and BB are at their mid-point levels - may considered to be not a factor.
XLRE: The trending and the price action is bad. The price has been hugging the 150-day moving average for a while and now is at the bottom of a horizontal channel. The RSI and BB are indicating somewhat oversold but not completely. The next support level below is -5.25% below current level. So, what to do with this? I will place it in my shortlist for shorting for now.
XLE: The 150-day moving average is curling the wrong way if the trending wants to reverse to bullish. The price action has been very bad. There is a general sentiment in the markets that energy will pick up with oil prices rising. But I do not see any positive price momentum yet. The XLE is the worst performer in May so there could be a sympathy bounce. No recommendation on this one. There is a big unfilled gap below (which is -8.20% below current level) and a small unfilled gap above (which is +14.30% above current level).
XLF: The price action has been bad and with the banking situation unresolved it is hard to see how the trending and price action reverses meaningfully. No recommendation on this one. There is an unfilled gap above (at +1.29% above current level) and an unfilled gap below (at -4.85% below current level).
Expected Price Range
I am going to track this as a new analysis every weekend. It sets some guidelines on what to expect from price movements in the coming week.
There are 2 ways to use these expected price ranges. One is to place trades and potentially know what the weekly move could be to take off the trade. The other is to place the trade after the price has already moved the range within the week. Note that the probability of price moving within the low level and high level is 68%.