This column assumes that ETFs are the primary investment tool for the reader.
Please see my weekly market summation for a review of the macro-economic environment and general macro-level market trends.
Investment thesis: the macro-averages are now in a bullish posture; it’s a good time to take a new position. But be careful; defensive sectors are starting to rise, indicating traders are a bit more cautious.
Let’s start by looking at last week’s market activity, beginning with the treasury market:
The treasury market moved lower on Monday and then traded sideways for the rest of the week. Volatility was higher on late Tuesday and Wednesday as the market digested the whipsaw activity regarding additional fiscal measures. Also note the sharp sell-off and subsequent rally on Friday, likely due to additional fiscal talk.
SPY trended higher for the entire week as shown by the central tendency line in blue. t took the index an entire day to recover from Tuesday’s sell-off, but it did recover.
I noted in my weekly round-up that smaller-caps led the market higher this week. Notice that IWM had a very strong move higher earlier in the week. This explains why small caps did so well last week.
Let’s pull the lens back to the 2-week time frame:
During the last two weeks, the treasury market has clearly trended lower, as shown by the 200-minute EMA (in magenta). The ETF has gapped lower twice and then consolidated sideways.
While larger caps are higher, their respective charts are messier. QQQ – which has led the markets higher for most of the post-lockdown rally – is struggling. It’s also been prone to sharper, higher-volume sell-offs.
In contrast, smaller caps have stronger charts. Mid-caps have a solid uptrend in place. This index has far fewer higher-volume sell-offs compared to the QQQs.
The same pattern emerges in the 30-day charts:
30 days ago, the treasury market was higher. It gapped lower and traded sideways until early October, when it again gapped lower. It is currently near a month low.
Smaller caps have all moved higher since the end of September and are now at 30-day highs.
In contrast, larger-cap indexes gapped lower at the beginning of September and meandered slightly lower for the month. During the first full trading week of October, they started to move higher and have moved through resistance.
To sum up the shorter time frames:
1.) Overall, treasuries are modestly lower during the last 30 days.
2.) Smaller-caps have rallied during the last week and have moved through key price levels. They are now at/near monthly highs
3.) Larger caps are moving higher but are still below levels from mid-September.
Ideally, smaller caps will keep moving higher, pulling larger caps with them.
The trends are positive on the longer time frame charts:
SPY has broken through resistance and is now moving higher. QQQ has a similar pattern
Micro-caps started to move lower about a month before larger-cap indexes. Micro-caps have rallied strongly in the last 5-7 days. Volume is also positive and momentum is positive.
The conclusion is clear: the charts indicate that it’s time to get back in the market.
Let’s now turn to sectors, starting with the performance tables for the last week:
Data from Finviz.com
For the first time in a long time, energy is on the list, occupying the number two spot in the 1-week column. XLE is moving higher from an oversold perspective (see below). Utilities are on the two most recent columns, indicating that traders are starting to think defensively. Technology is still in three columns, although it’s not in the week or 3-month columns, indicating a higher level of recent underperformance. Basic materials is still doing well.
Data from Finviz.com
Energy is clearly the worst performer; it’s at the bottom of four columns save the most recent. Staples and communication services are prominent in recent time frames; real estate is still weak as well.
Next, let’s take a look at the latest RRG:
Tech and communication services are still weakening, although tech turned a bit higher this week. Despite its strong performance during the last few months, XLB is about to move into the weakening quadrant. Consumer discretionary will soon make the same transition. Utilities and staples continue to rally into the improving quadrant; health care turned in that direction this week. Despite its strong performance this week, the energy ETF is still on a very bearish trajectory.
Considering its strong movement this week – and tremendous reversal of fortune, let’s start with XLE. Fundamentally, the sector is weak:
Investment thesis: the economic fundamentals of the oil industry are weak: oil prices are stuck in the lower 40s, which is putting tremendous pressure on the industry. The latest Dallas Fed report shows the industry is still in a sharp contraction, which is causing the XLE to decline. Avoid this sector for now.
This means that a rally is either anticipating a rebound or is purely technical in nature.
The weekly chart is very weak. Prices dropped sharply in the Spring, as the oil market all but collapsed during the lockdowns. The sector rallied during the summer but has since trended lower.
Earlier in the week, I looked at look at XLE and found the 30-day chart interesting:
Traders probably locked at this chart because of the reverse head and shoulders pattern that is still ongoing.
However, the daily chart is still very soft. Prices have only been moving higher for about a week, and that’s after a nearly two-month drop. The longer EMAs are still dropped, while the shorter EMAs are below the longer. This week’s move was very preliminary. Taking a position right now would be considered very high-risk.
Next, let’s turn to the health care sector (disclosure: I’m currently long), beginning with the 2-week chart:
Starting in early October, this ETF started to rally. It’s moved consistently higher since printing a series of advances followed by consolidations. Notice the 200-minute EMA (in magenta), which is in an uptrend.
The XLV printed a double bottom at the end of September. Notice the structure of the subsequent advance: there are a number of standard consolidation moves. This is a solid move higher.
XLV consolidated in September. While prices moved below the shorter EMAs, they remained above the longer EMAs. But it broke through resistance at the end of last month and is now approaching a 1-year high.
Finally, let’s take a look at the utilities sector (disclosure: I’m long).
Utilities formed a double bottom at the end of September and have been moving higher since. This is very solid uptrend – prices have advanced and retreated in a very balanced way. The ETF is now near a 1-month high.
XLU trended modestly lower during August and September, staying right around the 200-day EMA. During the last few weeks, this ETF has printed a very strong rally, especially for a defensive sector. It has moved through resistance and has plenty of upside room to run.
Wrapping everything up, the good news is that the averages are moving higher after having broken though resistance. That means it’s a good time to take new positions. But the rise of defensive sectors means that there’s a rising defensive tone to the market. Gains in the more popular sectors (tech, communication services) might not be as large as before. It also means that gains in the macro markets might be less pronounced.
Disclosure: I am/we are long XLU, VLV, XLP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.