Price is King

The S&P 500 ETF $SPY is currently displaying a YTD return of 8.06%. To say the month of January was one for the bulls is a complete understatement. We’ve seen a shift in many fundamental factors that influence market sentiment, such as the Federal Reserve’s tone on interest rates, China’s slowing economy, and US-PRC trade talk “progression”. (I put this in sarcastic quotation because who really knows where we stand in these trade talks, other than what news outlets occasionally barf out.)

But forget trade talks, forget earnings season, forget Fed Chair Jerome Powell’s weak stomach and his impressionable attitude toward stock market volatility. What does the most important variable of all tell us? That variable being, PRICE! I believe market technician Ian McMillan said it best in a recent tweet. “It’s amazing that we, as market participants, allocate capital based on the idea of asset prices going up/down…but yet so many choose to put a high level of importance on a bunch of random data rather than price.”

So what is price telling us? Are we out of the woods or is a retest of the December lows still a probable outcome? Unfortunately I can’t tell you that (no one can) but I can show you where the evidence is pointing and how I personally am digesting the data to help better my investment decisions.

S&P 500 Futures Chart 1D: Continuous

The above is a daily chart of the S&P 500 futures. Many strategists, traders and technicians saw the 2600 level for the S&P 500 as a critical support/resistance zone. We saw demand pick up at this level during the prior 3 month consolidation and many speculators expected a much larger display of resistance this January. Nevertheless, stocks rallied through, and are now showing increased demand above 2600.

Taking a look at the long-term picture, below is a weekly chart of the S&P 500 $SPX. It is very clear, looking at the 14 period Relative Strength Index, that momentum has been slowing for some time now. The question investors now have is, “Was December the worst of it?” I certainly believe the S&P 500 trading above 2600 is a win for the bulls, but until we establish a ‘higher low’ on a weekly time frame, it’s safe to expect US indices to trade within a neutral range (however wide that range may be). Remember volatility still has its prominent presence in this market. It’d be perfectly normal for the S&P 500 to trade +3% one week and -3% the next.

So what’s the point of all of this? If we are thinking that US stocks may trade flat for the next 6-12 months, what’s the point of even participating? In every market there’s leaders and laggards, right now the 2019 landscape is looking very different from what we saw this time last year. Given it’s only January (relax Shane) I still find it important to look into who is showing true strength relative to the broader market. The below from Koyfin Charts, displays 2018 annual returns for varying sector and sub sector ETFs.

It’s safe to say, some of 2018’s biggest laggards are now “playing catch up”. Sectors such as Industrials $XLI (+11.60 YTD) and Energy $XLE (+13.15% YTD). Sub-sectors such as Regional Banking $KRE (+14.17% YTD) and US Home Construction $ITB (+13.58% YTD) are all showing some serious strength to start off 2019. Now the first ahead out of the gate, do not always finish the year as leaders. In 2018 we saw Financials, Consumer Staples, and Materials all make their YTD % return highs in the month of January.

The rotation from Large Cap Growth stocks into Large Cap Value and High Dividend paying securities is still on going. So far YTD we’ve seen Growth $SPYG (+7.45%) High Dividend $SPYD (+7.98%) and Value $SPYV (+8.73%). I believe we continue to see further rotation into these lower beta large cap stocks.

One of 2018’s leaders, Healthcare $XLV is participating in the rally, but relative to the S&P 500 it remains behind. The below is a ratio chart of Healthcare $XLV vs. S&P 500 ETF $SPY. The chart is resting at support and providing an alert to Healthcare bulls that the sector’s primary trend may be under fire.

Taking a look at some sub-industries of HC, below is the SPDR S&P Healthcare Services ETF $XHS 1W chart. The weekly candle closed above the inflection point of supply and just beneath the 50 week moving average. This is not bearish behavior, and despite $XLV showing a +4.90% YTD return, $XHE is up +11.07%.

There are more sub-groups of healthcare that require our attention. Such as Pharmaceuticals, Bio-tech and Healthcare Equipment. The below is a 1D chart of SPDR Healthcare Equipment ETF $XHE. We’re seeing a descending broadening wedge chart pattern. This pattern is bullish in nature. We saw a breakout above the supply line this week, which if confirmed, would leave a price target of $83 per share. $XHE picked up demand above the 50 Day Moving Average but is still currently trading below the 200 Day Moving Average. It’s tough to paint the Healthcare sector with a broad stroke of bull or bear, but there are defiantly pockets within the sector displaying bullish behavior.

Lastly, the below is what I believe to be one of the most important charts of 2019 thus far. It’s not as flashy as Tech or Healthcare, but I truly believe it tells the story of this market.

$XLB Materials Sector ETF 1W

We’re seeing a bullish RSI divergence on the weekly chart and a horizontal trend line that a weekly candle stick has closed above for 2 straight weeks. I believe if $XLB makes a ‘higher high’ and we see price action above $60 per share, it will bid extremely well for the overall market. I wouldn’t say “I’m bullish Materials” but I view this sector as a gauge of how well the economy is and what stage of the business cycle we find ourselves in. It’s known that the materials sector is rather sensitive to changes in the business cycle and it is directly tied to consumer goods. If demand for goods drops - then the demand for the raw materials which produce these goods will decline too.

That’s enough out of me - See you next month!