Video and Report Headlines
- Composite Breadth Model is Bullish
- Market Mood Swings
- Volatility Ticks Up as SPY Hits July High
- QQQ Forms Lower High as Relative Performance Wanes
- MAGS Forms Outside Reversal at Key Retracement
- Defensive Sectors Lead with New Highs (XLU, XLP, XLV)
- BAA Yield less AAA Yield
- Yield Spreads Fall back as Stress Subsides
- Semiconductor ETF Falls after Outside Reversal
- Cybersecurity ETF Challenges February High
- Software ETF Bounces within Long Consolidation
- FinTech ETF Breaks July High
- Leading ETFs: XLRE, ITB, ITA, KIE, IBB, FAN, PBJ
- Palo Alto, CyberArk, Jack Henry and Paypal Break Out
- 20+ Yr Treasury Bond ETF Remains in an Uptrend
- Gold SPDR Maintains Breakout
- Bitcoin Bounces within Downtrend
The next Weekly Report will be posted on Friday morning, September 13th.
September Scheduling
Due to upcoming travel, the September publishing schedule for the Chart Trader Weekly Report/Video will be as follows:
- Friday, September 6th
- Friday, September 13th
- Thursday, September 19th
- Sunday, September 28th
I will also publish two educational reports and videos.
- Friday, September 20th – Zones of Interest
- Friday, September 27th – Conditions of Interest
The weight of the evidence remains bullish for stocks. The Composite Breadth Model is positive, yield spreads are at relatively low levels and SPY is well above its rising 200-day SMA. We also saw new highs in the S&P 500 EW ETF, Industrials SPDR and Finance SPDR in late August.
Despite these positives, there are some immediate concerns that could lead to a correction in the broader market. QQQ, the Technology SPDR, the Mag7 ETF and the Semiconductor ETF are already in correction mode and showing relative weakness since August. These four represent the risk end of the market and recent performance shows some risk aversion in stocks right now.
On the risk-off end, we are seeing new highs in the defensive groups as money moves into less risky areas of the stock market. Throw in weak seasonal patterns in September, and the odds are building for a corrective period in the stock market. While we cannot forecast the length or duration of a correction, it could last into October and set up a buying opportunity.
If the market corrects with SPY and the S&P 500 EW ETF falling back to their August lows, I would expect most stocks and stock ETFs to come under pressure. Why? Because correlations rise when the broader market falls. This means even the leading tech ETFs (IGV, FINX, CIBR) will likely come under pressure. In short, picking winners during corrections is a tall order.
Composite Breadth Model is Bullish
The chart below shows SPY with the 5-day SMA of the Composite Breadth Model at +5. This model turned bullish on December 7th and remains bullish. A positive CMB signals a favorable environment for stocks (bull market). Even with a bullish CBM, we can still see pullbacks, corrections, rotations and trading ranges.
The Composite Breadth Model aggregates signals in over a dozen breadth indicators from the S&P 500 and S&P 1500. This means it covers large-caps, mid-caps, small-caps, NYSE stocks and Nasdaq stocks. It ranges from +5 to -5. A bull market is present when the 5-day SMA of the CBM is at +1 or higher. A bear market is present when below +1.
BAA-AAA Spread Remains Bullish for Stocks
The next chart shows the BAA-AAA yield spread edging higher since June, but short of a breakout (red line). This indicator remains bullish. A break above .78 would put this spread at its widest level since January and signal increasing stress in the corporate bond market.
According to Moody’s, AAA bonds are the highest grade corporate bonds with the lowest level of default risk. BAA bonds have moderate credit risk and “certain speculative characteristics”. The spread between these two narrows (falls) when credit conditions are favorable (no stress). The spread widens (rises) when conditions are deteriorating (increasing stress).
BBB and Junk Spreads Remain Bullish for Stocks
The chart below comes from TradingView. It shows SPY, the BBB spread, the Junk bond spread and the CCC bond spread with their 200-day SMAs. The BBB and Junk bond spreads turned up over the last few days and broke back above their 200-day SMAs (blue shading). They are still at narrow levels overall and within their 2024 ranges. Thus, they are bullish for stocks. These upturns, however, should be watched because follow through above the red lines would show stress in the corporate bond market. Breakouts at 1.4 in the BBB spread and 4 in the Junk spread would be bearish for stocks.
These spreads show the difference between a corporate bond yield (BBB) and the equivalent US Treasury bond yield. BBB bonds are the lowest rated investment grade bonds. US Treasuries are the ultimate safe-haven bonds. The spread between these two widens (rises) when stress builds in the corporate bond market. This is negative for stocks. The spread narrows (falls) when stress levels are low or subsiding. This is positive for stocks.
Medium Term Concerns
So far the weight of the long-term evidence is bullish. First, SPY and QQQ are still above their rising 200-day SMAs. Second, the Composite Breadth Model is positive. Third, the BAA-AAA yield spread has yet to break out. And finally, the BBB and Junk spreads turned up, but remain at relatively low levels and have yet to break out. These are items I watch for a long-term assessment. Short-medium term, there are three areas of concern. I am seeing relative signs of risk aversion as key offensive groups lag and key defensive groups lead. The third item is seasonal weakness during an election year. Let’s look at these one at a time.
Relative Weakness in Key Groups
The S&P 500 EW ETF (RSP) finished August at a new high and is clearly stronger than the S&P 500 SPDR (SPY). Surely, this counts for something. Truth be told, relative weakness in SPY and other key groups is more important. The market performs better when SPY leads RSP, not the other way around. It also performs better when QQQ, the Nasdaq 100 Equal-Weight ETF (QQEW) and the Semiconductor ETF (SOXX) lead the S&P 500 EW ETF. QQEW strips the market cap weightings and represents the average stock in QQQ. The chart below shows SPY and four ratio charts (price-relatives), which reflect relative performance. As an example, the QQQ/RSP ratio rises when QQQ outperforms the broader market (RSP) and falls when QQQ underperforms.
On the chart above, SPY fell throughout 2022 and all four price relatives fell in 2022 as well (red arrows). Underperformance in these groups was negative for SPY in 2022. These price-relatives turned up in early 2023 and rose into 2024. Relative strength in these groups was positive for SPY as it advanced into 2024. More recently, the QQEW/RSP price-relative peaked in January and fell sharply since August. The others peaked at the end of June and fell sharply since July. Relative weakness in QQQ, QQEW and SOXX reflects risk aversion in the stock market and this is negative. Relative weakness in SPY means the most important benchmark for US stocks is lagging. This is also negative.
Defensive Groups Leading
Not only are several key groups lagging, but the defensive groups continue to lead and hit new highs. This shows money moving into areas of the stock market with lower risk. No matter what happens to the economy or AI, we still need the products supplied by the Consumer Staples, Utilities and Healthcare sectors.
These sectors often struggle to outperform during bull markets because they have lower volatility. During periods of broad market weakness, they often outperform because they hold steady or even rise. The first chart shows the Healthcare SPDR (XLV) breaking out in mid July and moving to a new high again this week. The ETF is up 10% since early July and 16% since mid April. XLV is getting a bit extended short-term. The blue shading marks an area to watch for support should we see a pullback (150 area).
The next chart shows the Consumer Staples SPDR (XLP) with a breakout in mid July and extension to new highs this week. Anything hitting a new high or even a three month high is leading. XLP hit a new 52-week high and is in a confirmed uptrend. This just means there is no setup on the chart or recent breakout. The blue shading marks an area to watch should we see a pullback. The 78-80 area marks broken resistance, which turns support, and a 33-50 percent retracement zone.
The next chart shows the Utilities SPDR (XLU) with a breakout in July and a sharp move higher into early September. XLU is up 13.5% since early July and also getting short-term extended. Broken resistance and the early August lows mark the first support zone in the 72-73 area (blue shading).
Seasonal Patterns are Unfavorable in September
Seasonal patterns are tricky for trading because trend (SPY/QQQ), breadth (Composite Breadth Model) and market mood (risk on/off) are more important. At best, seasonality is in fourth place for market analysis. The chart below shows the seasonal pattern for the S&P 500 over the last 30 years. There are two distinct bullish periods: mid March to early June and mid October to yearend. The period from September to mid October is seasonally weak.
Note, however, that the S&P 500 closed higher 50% of the time over the last 30 years. This means it closed lower 50% of the time, which makes September a coin flip. September shows negative seasonal patterns because some of the largest losses occurred in September. These include -8% in 2001, -11% in 2002, -9.1% in 2008, -7.2% in 2011 and -9.3% in 2022. Also note that the S&P 500 closed lower the last four Septembers (2020, 2021, 2022, 2023).
The next chart is from Jeff DeGraff at RenMac (Renaissance Macro). It shows the average monthly returns for the S&P 500 since 1928. The dark red bars represent election years and the gray bars show other years. The S&P 500 is largely lower in September and October during election years. It is also largely lower during September in other years. Thus, September is the double whammy. Election years are understandable because there is often a lot of uncertainly heading into the election. This uncertainty resolves itself and the market typically rallies in November and December, regardless of who wins.
Zones of Interest for SPY and QQQ
SPY and QQQ are in long-term uptrends. Both recorded 52-week highs in July and both are above their rising 200-day SMAs. Despite these long-term uptrends, we could still see a correction. Note that corrections come in all shapes and forms. Sometimes we see trading ranges (time correction). Other times we see a decline to 200-day SMA (price correction). We could also see a combination of both with a choppy decline (price-time correction). Note that a decline is considered a correction as long as the long-term trend is up and the Composite Breadth Model is bullish.
During a correction, I mark Support-Retracement Zones, which is an area that could mark a bottom or give way to a reversal. The Support-Retracement Zone is a zone of interest. This is an area where we want to go on high alert for a possible buying opportunity. There are two levels in the Support-Retracement Zone. First, I look for support from prior lows, a key moving average or a prior breakout. Second, I look for a retracement level that jibes with these support levels. The intersection of support and retracement levels marks the Support-Retracement Zone. The next charts will show Support-Retracement Zones to watch in the coming weeks.
The next chart shows SPY with two highs in the 560 area (yellow arcs). SPY challenged resistance with a mid August surge and closed above 560 on August 23rd. The ETF then stalled and fell from resistance with a 2.1% decline on Tuesday. This is the first sign that SPY is forming a second peak for a possible double top. A break below the early August low would confirm the double top. Even so, I am more interested in the possible Support-Retracement Zone in the 491-510 area (blue shading). Here we have a 33-50 percent retracement zone and support from the April and August lows.
The next chart shows QQQ with an outside reversal on August 22nd and further weakness to confirm this short-term reversal pattern. A lower high formed from July to August and the medium-term trend is down. The blue shading marks the Support-Retracement Zone in the 415-425 area. Here we have support from the April lows and the 50% retracement line.
Absolute Weakness in Key Tech Groups
In addition to relative weakness, we are also seeing absolute weakness with lower highs and confirmed outside reversals in key groups. These include the Technology SPDR (XLK), Mag7 ETF (MAGS) and Semiconductor ETF (SOXX). The charts below shows the Support-Retracement Zone to watch going forward.
Cybersecurity, Software and Fintech Are Back in their Ranges
The Cybersecurity ETF (CIBR) and FinTech ETF (FINX) are holding up the best of the tech-related ETFs. The Software ETF (IGV) is also above its rising 200-day SMA. Nevertheless, they are not immune to broad market swings and could come under pressure should the market correct in the coming weeks. Overall, all three ETFs fell back the last few days and are largely range bound the last several months. The ranges reflect choppy trading and we could see more choppy trading in the coming weeks. The low end of these ranges mark “zones of interest” should we see a pullback in the coming weeks.
Nine Leading ETFs
In addition to the defensive ETFs featured above, I am also seeing strong uptrends in these nine ETFs:
- Real Estate SPDR (XLRE)
- Residential REIT ETF (REZ)
- Home Construction ETF (ITB)
- Aerospace & Defense ETF (ITA)
- KBW Bank ETF (KBWB)
- Insurance ETF (KIE)
- Biotech ETF (IBB)
- Healthcare Providers ETF (IHF)
- Water Resources ETF (PHO)
Note that I do not see any setups on these charts. They are simply in the middle of strong uptrends.
Insulet Gets Big Breakout
The chart below shows Insulet (PODD), which is part of the Healthcare SPDR (XLV) and the Telemedicine Digital Health ETF (EDOC). PODD advanced 78% along with the broader market from October to December and then embarked on a long consolidation (January to August). The first decline retraced 2/3 of the 78% advance, which is normal for a correction. After firming in the 160 area from March to May, the stock moved above its 200-day SMA in June. It fell back to the 200-day in August and pretty much held. An eight month triangle took shape as the price range narrowed. PODD made its move this week with a big breakout and I view this breakout as long-term bullish. The upside target is in the 280 area and support is set at 180. The bottom window shows the price-relative turning up as PODD starts to outperform.
Meta Platforms Holds Up Well
Meta Platforms (META) is a big component in Nasdaq 100 ETF (QQQ) and the Mag7 ETF (MAGS). The stock is holding up exceptionally well the last few months and weeks. Long-term, the stock advanced 90% and the retraced around half with a decline into late April. META worked its way back to its spring highs in July and then got caught up in broad market volatility in August. Overall, a large Ascending Triangle is forming and this is a bullish continuation pattern. A breakout would forge a new high and signal a continuation of the bigger uptrend. Short-term, the stock surged to resistance in August and then worked its way lower with a falling flag into September. This is a short-term bullish continuation pattern and a breakout at 526 would be bullish. A short-term breakout would increase the chances of a long-term breakout.
TLT Remains in an Uptrend
The next chart shows the 20+ Yr Treasury Bond ETF (TLT) within an uptrend since the June breakout. TLT surged in early August, consolidated with a pennant into early September and is making a bid to break out. Pennants are short-term bullish continuation patterns and a breakout would signal a continuation of the bigger uptrend. Non-farm payrolls will be reported on Friday and this could increase volatility in the bond market. Even if the pennant breakout fails, the bigger trend remains up with an upside target around 108. The July low marks long-term support at 91.50.
GLD Maintains Breakout
There is no change in the Gold SPDR (GLD) chart as the ETF tagged new highs in August. GLD is well above its rising 200-day SMA and in a long-term uptrend. Most recently, GLD consolidated from mid April to early July and broke out in mid July. There was a battle around this breakout zone as the ETF formed a pennant, but the breakout ultimately held. The May-June lows mark support at 210.
Bitcoin Breaks Down
Bitcoin remains in a long-term downtrend with a series of lower lows and lower highs since April. This benchmark crypto currency fell sharply in early August as the market got hit with a risk-off rush. Bitcoin also recovered with the market over the last few weeks and even broke its 200-day SMA, though it did not last. Overall, I view this bounce as a counter-trend move. Bitcoin broke the lower trendline over the last few days and the signals a continuation lower. The lower trendline extends to the 52,000 area for the first downside target. Below this level, the next support zone is around 45,000.
