This series is an extension of my regular, trading-day “Technically Speaking” series. Here, I assume that broad-category ETFs are investors’ primary investment vehicle. The column is devoted to intermediate-term (3-6 months) trades and longer.
Investment thesis: Put all new investments on hold this week. SPY and QQQ are setting up for a move lower, which is supported by the XLK, XLC, and XLY charts. Also, make no new moves into any sector ETF; the charts are weakening. Make sure you’re hedged.
At the beginning of the month, SPY broke a two-month uptrend. Prices moved through the 10- and 20-day EMAs, but stayed above the 50-day EMA until Friday, when the index closed below the 50-day EMA. Momentum is declining, volume has ticked higher, and the advance/decline line has trended sideways.
QQQ shares many of the same characteristics of the SPY chart – a trend break, increasing volume, and declining momentum. Prices closed below the 50-day EMA on Thursday and Friday.
Small-cap indexes are actually in a slightly better technical position than larger caps:
Prices of mid-caps (left) are still above recent lows; micro-caps (middle) are above the 10-day EMA; and small-caps (right) are between the 10- and 20-day EMAs. While all three were on the buy list, hold off for now because of the potential for a sell-off in the larger caps which may affect the smaller-cap indexes.
All index positions should be hedged now. This can be done with sell-stops, put options, inverse ETFs, or the inclusion of Treasuries, a tactic whose returns are outlined in the following table:
Data from Finviz.com. The number on the left shows the SPY percentage, and the number on the right shows the TLT percentage. Green means an increase; red means a decrease.
Notice that this portfolio performed very well during the six-month and one-year time frames – a period of very high volatility.
Let’s now turn to the sector ETFs, starting with a look at the best- and worst-performing ETFs over multiple time frames.
Data from Finviz.com
The table is dominated by XLB and XLI. The former appears three times while the latter appears twice. XLK (technology) is only on the list once – it is the best performer during the last year. XLC (communication services) is absent.
Next, let’s look at the list of the worst-performing ETFs over the same time periods:
Data from Finviz.com
Energy is on the list four times, which is due to the weak performance of oil prices. Communication services are on the list in the week and month time frames while technology is the second-worst performer during the last month.
Next, let’s take a look at the relative rotation graph:
This graph contains two key pieces of information: 1.) Communication services and technology are now “weakening”; consumer discretionary is moving in that direction (see the right side of the chart). These are three of the largest components of SPY and QQQ. 2.) Defensive sectors are moving from lagging to improving status.
Rephrasing this data: Three of the largest components of SPY and QQQ are weakening (please see this article for additional chart detail), and investors are shifting assets to sectors that are more likely to hold value in a downturn.
Combine the RRG graph data with the SPY and QQQ charts and we arrive at this conclusion: The market may be in a period of subtly shifting from rally to consolidation or sell-off. This is not set in stone and still may not occur. But there are enough pieces aligning themselves on the chessboard that the prudent course of action is to pause and hedge positions or take some profits off the table.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.