ChartWatchers Newsletter

Broad REIT ETFs Hit Interesting Junctures, but Hotel and Retail REITs Weigh

The REIT iShares (IYR) and the Vanguard REIT ETF (VNQ) are at interesting junctures because they corrected within an uptrend. Even though both are at potential reversal zones, chartists should be careful because retail REITs and hotel REITs are weak spots within the REIT universe. The chart below shows IYR with an uptrend since November and a recent pullback to the rising 200-day EMA in May. The ETF held just above this EMA and firmed the last two weeks. It got a bounce on Thursday-Friday and a breakout at 79 would reverse the April-May pullback.

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Bearish Signals Continue to Mount

It was a rough finish to the week and it has shaken up the DecisionPoint Scoreboards. Additionally, the Intermediate-Term Trend Model (ITTM) generated a Neutral signal on the equal-weight Financials ETF (RYF) and a weekly Price Momentum Oscillator (PMO) SELL signal popped on the equal-weight Consumer Discretionary ETF (RCD). Believe it or not, these Scoreboards were completely green on May 11th (except the Dow IT PMO SELL). We began seeing signs of deterioration even before this week's short-term correction when the IT PMO signals on the SPX and OEX triggered a SELL signal on 5/12. 

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When in Doubt, Sit it Out

Anyone who trades the market on a regular basis knows how important it is to use whatever tools are available to make important decisions. This includes using charts to determine the strength/weakness of a specific stock, sector or index, zeroing in on key price and technical support/resistance levels and getting a handle on the overall mood of the market. For me one of the key indicators I use to help me make decisions is the VIX, what many know as the market fear meter.

To give you some historical perspective, the all time low on the VIX was near 9.40 in December, 2006, while the all time high was near 90. Last week got as low as 9.56; pretty darn close to the all time low. Traders look at the VIX in one of a few ways. First, when it is extremely low it signals traders are relaxed and in a buying mood. If it's too high then there is a lot of worry and traders get more defensive. However, I have often used the VIX as a contrarian indicator; if it gets too low it shows too much complacency - time to buy - and if it gets too high traders might be too scared - time to sell.

For example, just look at the chart below on the VIX from last week when it neared its all time low. It spiked dramatically as the market sold off sharply on Wednesday. That made sense to me as in looking at the VIX I felt the market had gotten way too complacent; a pullback was overdue, and we got one. I was feeling pretty good having shifted my trading bias to the downside. Now fast forward two days to Friday and lo and behold; the market moved from being scared to being more relaxed. My short bias was short lived!

When I start seeing big swings in the VIX like we have the past few months the first thing I do is get more defensive as everyone is getting whipsawed, both on the long and short side. This makes it more difficult to come out on top either on the long or short side and can often be painful in the pocket book. The other thing we do at EarningsBeats is scan for companies that look very oversold and have reported strong earnings. These are added to our "Candidate Tracker" and some of these become trade alerts for members. If you would like to see a sample of the Candidate Tracker just click here.

The bottom line to me is this; when volatility picks up like it did last week it makes sense to get more defensive. This can include being much more selective, trimming position size, tightening stops and locking in profits whenever possible. And, for those who flat out want to protect capital at all costs, simply moving to the sidelines until things settle down.

At your service,

John Hopkins

Are We Topping? Watch These Two Industry Groups

We saw the first significant selling pressure in months last week, especially on Wednesday.  Financials (XLF) led the rout to the downside, but the sector did bounce back later in the week and, in the process, held key neckline price support within two key industry groups - banks ($DJUSBK) and life insurance companies ($DJUSIL).  Both of these groups do well in a rising interest rate environment so it'll be important to watch the 10 year treasury yield ($TNX) as well to see if the TNX can hold onto key yield support levels.  Here are the DJUSBK, DJUSIL and TNX, all featured on one chart:

The TNX has been successful in defending yield support in the 2.15%-2.20% range.  Should that continue to hold and start to rise again, then look for both the DJUSBK and DJUSIL to hold the green support lines above and lead the next rally.  A continuing drop in the TNX, however, would likely result in breakdowns in both banks and life insurance companies and that most likely would also signal overall stock market weakness into the summer months.

Happy trading!


Financials Underperform After The Fed Meeting

It seems that nothing is ever easy in the market, but following price action is really important as we know.

Following the November 1-2, 2016 Federal Reserve meeting, Banks (Financials in general) went ballistic as it looked very probable that the Fed would raise rates at the December meeting. Coinciding with that was the election of President Donald Trump a week later. It is important to note that the rally in Financials started before the election and ended on the next Fed meeting December 14th shown in the chart below. The December Fed meeting, the January Fed meeting and the May Fed meeting all had the KRE at the same level. The March meeting had a 2% gain above the December meeting but gave it back.

Looking back to the September 2016 period, the banks had been in a slight trend of higher highs and higher lows between the September Fed meeting and the November Fed meeting. I have shown that on the chart below. Shortly after the November Fed meeting, the financials and the broad market pulled back for a day or two, then accelerated higher with the $SPX gaining 60 points off the lows before the US presidential election.

Currently the Financials are in the same sort of mild uptrend of slightly higher highs and lows between the March and May Fed meetings. This 2 day post-Fed setup has just happened again. The Friday close saw the $SPX have a sudden surge to new closing highs on Friday to set up the next week which is a little different.

While the outcome of the French election will also be known on Monday, the setup for the banks to go higher here looks similar to just after the November Fed meeting. There are two sideways days in the Bank ETF KBE after the Fed meeting. Do we get an explosive move higher on French results or Fed results?

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Whipsaw Intermediate-Term PMO BUY Signals on SPX and OEX

 I had already figured out what I would write about in today's ChartWatchers article, but that was put on hold when I received a Technical Alert in my email box telling me that we had IT Price Momentum Oscillator (PMO) signal changes on both the S&P 500 and S&P 100.  These signals are generated on the weekly charts.  Now, looking at the DP Scoreboards below, there is a clear story being told. Major markets are bullish in all three timeframes. Of course, the Dow has the a "red arrow" SELL signal left. Let's see how the IT PMO BUY signals came about and look at where the Dow is in relation to the others.

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Create McClellan Oscillators for the Nine Sector SPDRs and the Gold Miners

The McClellan Oscillator is a breadth indicator that Chartists can use to enhance their analysis of an index. StockCharts carries the McClellan Oscillator for dozens of broad market indexes, but not for the S&P sectors. There is no need to fret because StockCharts users can create the McClellan Oscillator using the AD Percent indicators and MACD. You can read more about the McClellan Oscillator in our ChartSchool. 

We first need a base symbol, which can be AD Percent or AD Volume Percent. As an example, AD Percent equals advances less declines divided by total issues. You can find a complete list of these symbols here. I will use S&P 500 AD Percent ($SPXADP) for an example. The chart below shows daily values for AD Percent as a histogram in the top window. The second window shows the EMAs used in the McClellan Oscillator for reference (19-day EMA and 39-day EMA). The McClellan Oscillator is the difference between these EMAs and chartists can plot this difference by applying MACD to AD Percent, which is shown in the third window. MACD equals the fast EMA less the slow EMA. In this case, MACD(19,39,1) is the 19-day EMA less than 39-day EMA. The signal line is hidden because signal line EMA is set to "1". 

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Sector Rankings and Weightings Are Still Market Positive

SECTOR LEADERSHIP... One of the problems facing the current stock market is that some sectors have been rising, while others have suffered large losses. Since the start of the year, for example, technology has gained nearly 14% versus a 6.7% gain for the S&P 500. Energy stocks, however, have plunged -10% this year. Industrial metal miners have lost -6% as have telecom stocks. Obviously there's a tug of war going on within the market as a whole. The question is which side is winning. To determine that, it's not just enough to count how many sectors are rising (8) and how many are falling (3) and by how much. We have to also consider how those sectors are weighted in the S&P 500. That gives us a better measure of how much the winners are impacting the S&P 500 versus the losers. Chart 1 shows the top four sector gainers since the start of year to be technology (13.7%), consumer discretionary (10.4%), healthcare (10.3%), and industrials (7.6%). All four did better than the S&P 500's gain of 6.8%. Four outperformers out of eleven sectors might not sound like much. But those four account for 57% of the S&P 500 weightings. Technology accounts for nearly 20%, healthcare (15%), cyclicals (12%), and industrials (10%). That alone gives an edge to the bulls.

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Earnings Season Favors the Bulls

Recent headlines have focused on tax reform, health care reform, partisan bickering, the president's first 100 days. But in the background many companies have been coming up big when reporting earnings which is why the market has been so strong of late.

While the bears have been hoping for a big pullback the bulls have gone about their business with the NASDAQ hitting an all time high while the Dow and S&P, though lagging, have remained within easy striking range of their respective all time highs.

With strong earnings come high reward to risk trading opportunities as long as you are willing to be patient. For example, take a look at the chart below on EXAS, a company that we issued a trade alert on for our members based on strong earnings, that turned into a nice winner.

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Investment Grade Corporates Outperform Junk Bonds

The green bars in the chart below show the iBoxx Investment Grade Corporate Bond iShares (LQD) trading at a new five-month high after clearing its 200-day average. The red bars, however, show the iBoxx High Yield Corporate Bond iShares (HYG) backing off from its early March high. The fact that investment grade bonds are rising, while junk bonds are weakening, carries a potentially negative message for stocks. That's because junk bonds are more closely correlated with stocks than bonds.

JUNK BONDS UNDERPERFORM... It's often instructive to see what various bond categories are doing relative to each other. That can tell us something about the mood of the bond market, as well as stocks. Right now, that mood is defensive. The green bars in the next chart show a relative strength ratio of the high yield bond ETF (HYG) divided by the investment grade ETF (LQD). The rising ratio since November favored high yield bonds. That's also when stock prices were rising. The falling ratio over the last month shows high yield bonds lagging. That also shows loss of risk appetite between the two bond categories. The falling HYG/LQD ratio also sends a negative message for stocks.