Breadth Extremes in Consumer Discretionary, Energy Breadth Triggers Net Bullish and Two Tech Laggards Return to Leaderboard

Today’s report is a bit of a hodge-podge. There are signs of extreme in some breadth indicators, but signs of extreme are not very good when it comes to timing because indicators can remain near extremes for a few months. I will then turn to the new breadth signal in the Energy SPDR (XLE) and the breakout on the chart. Even though Energy and Banks are leading the last three months, let’s not forget about the tech-related ETFs, which are breaking out to new highs and truly leading.

Consumer Discretionary Breadth Hits an Extreme

The Consumer Discretionary SPDR (XLY) is leading the charge with the most stocks trading above their 200-day EMAs. The table below shows this indicator for three indexes and the eleven sectors. Over 98% of XLY stocks are above their 200-day EMAs and this indicator is above 90% for four other sectors (XLF, XLC, XLB and XLI). In addition over 80% of stocks are above their 200-day EMAs for four more (XLK, XLP, XLRE, XLE). Healthcare and Utilities are the laggards, but even these sectors have more than 78% of stocks above their 200-day EMAs. Overall, these strong readings reflect broad participation in the current advance.

Some of these indicators are hitting extremes, but this is not always bearish. For example,  XLY %Above 200-day EMA (!GT200XLY) hit its highest level since April 29th, 2010. This extreme foreshadowed a decline in May-June 2010. Extremes make for interesting observations, but they are not very helpful when it comes to timing.  The chart below shows when %Above 200-day EMA exceeded 90% (red zones) and the prior four occurrences lasted three to nine months. These are classic cases of becoming overbought and remaining overbought.

The green zones show when the indicator moved from below 10% to above 90% and there are only two instances: March to July 2009 and April to November 2020. These instances reflect a remarkable shift from a bearish extreme to a bullish extreme. In the first instance, XLY continued higher from July 2009 until April 2010. This indicator may seem extended here in November 2020, but keep in mind that it takes strong buying pressure to produce such readings and this is more bullish than bearish.

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Energy SPDR Breadth Reverses Signal from January

The Energy SPDR (XLE), which was the last hold out on the Sector Breadth Model, turned net bullish last week as the 10-day EMA of XLE AD Percent ($XLEADP) surged above +30% and the Energy %Above 200-day EMA (!GT200XLE) exceeded 60% for the first time since January 2020. Two of the three indicators are bullish. XLE High-Low% ($XLEHLP) remains on a bearish signal because we have yet to see any new highs in the sector.

Click here for an article explaining the breadth indicators.

The next chart shows XLE surging over 40% from October 29th to November 24th and breaking out along the way. This powerful move reverses the long-term downtrend, even though StochClose has yet to exceed 60. The current move compares to the March-April surge and this one lasted until June with two short pullbacks along the way.

At this stage, I would either wait for some sort of pullback or playable pattern to emerge in XLE. This could involve an RSI dip into the 40-50 zone. I placed the ATR Trailing Stop on this chart for reference. Note that this stop is four ATR(22) values below the highest close since the breakout. I had to set the ATR multiplier at 4 to get the initial stop just below the low before the breakout (blue arrow).

Click here for an article explaining the ATR Trailing Stop

The next chart shows the DB Energy ETF (DBE) forming a pennant just above the channel breakout and 200-day SMA. DBE broke out last Monday and surged last week. Strength in fossil fuels is a net positive for energy-related stocks

Bullish Setups in Two Boring Tech ETFs

Boring and lagging ETFs turned into exciting leaders in November as we saw breakouts in the Regional Bank ETF (KRE), Oil & Gas Equipment & Services ETF (XES) and REIT ETF (IYR). These breakouts are bullish, but we should not forget about the prior leaders and ETFs with real growth prospects.

The chart below shows The Regional Bank ETF peaking just below its falling 200-day in June, forming a long falling wedge and breaking out with a 50 percent advance the last nine weeks. It is an impressive advance that is clearly bullish, but as MC Hammer would say: Can’t Touch This!

The KRE setup is similar to XLE: long correction from the June high, breakout and monster move. There have been a few two to three day pullbacks along the way, but I have yet to see a playable pullback. This would involve an RSI dip into the 40-50 zone and/or a flag/pennant on the price chart.

Even though banks, energy and other groups captured the market’s attention in November, I would not dismiss the prior leaders. Sorry, but I do not see secular growth happening for old school banks, REITs and fossil fuels. Furthermore, we should be interested in an ETF or stock when trading has turned boring and volatility is low, not when excitement and volatility are high.

The next charts show the Software ETF and Internet ETF hitting 52-week highs in early September and then moving into the boring camp as both traded sideways. Even though they are not leading on the three month timeframe, they are leading on the nine to twelve month timeframes. In fact, note that KRE and XLE are still down year-to-date.

After a massive advance from late March to early September, IGV and FDN were entitled to a rest. The consolidation over the last three months provided the pause that refreshes and allowed the ETFs to digest their big gains. Moreover, both formed a classic bullish continuation pattern: Ascending Triangle. Breakouts confirm these patterns and signal a continuation of their existing uptrends. Also notice how RSI dipped into the 30-50 zone in early-mid November and provided the mean-reversion setup just before the breakouts.

Strength in tech remains broad. The Software ETF (IGV), Semiconductor ETF (SOXX), Cloud Computing ETF (SKYY), Internet ETF (FDN), Mobile Payments ETF (IPAY) and FinTech ETF (FINX) hit new highs last week. The Cyber Security ETF (HACK) broke out of a falling channel and is very close to a new high. The demise of tech-related ETFs has been greatly exaggerated.

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
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