ETF Analysis and Ranking – SPY hits the Caution Zone as TLT and GLD Hold Uptrends

ETFs Ranked by WASS

Note that the ETF ranking tables at the top are separate from this commentary. The ranking tables are designed to help with trend-momentum strategies, while the analysis below is based on price structure, setups, chart patterns and pattern breaks. Click here for a detailed article and video explaining the Weighted Average Stochastic Score (WASS) and how it can be used for a rotation strategy.  

Where's the Mood Ring when you Need It?

This is one moody market. Less than three weeks ago, the mood was pessimistic as the S&P 500 hit a 52-week low with a 30+ percent plunge. Flash forward 12 days and the S&P 500 is up over 20% and the mood has changed to optimistic. Would you want to be involved with something showing these kinds of mood swings? While this kind of volatility can create opportunities, it translates into above average risk and is not the stuff of a steady and consistent uptrend.

Despite a 22.91% surge, the broad market environment remains bearish. Keep in mind that this surge follows a 33% decline and the S&P 500 has recovered less than half of this decline. The index recorded a 52-week low on March 23rd and is still over 9% below its falling 200-day SMA. In theory, this bounce could extend to the 61.8% retracement and even return to the 200-day. We got an overshoot to the downside and could get one to the upside.

Buying after big moves or on breakouts is a recipe for disaster when volatility is high. As noted on Tuesday, 20% bounces happen in bear markets and SPY is in a caution zone, if not an outright danger zone. With the bear market bounce entering its cautionary phase, this means most stock-related ETFs should also be treated with caution, especially after big bounces the last 12 days.

Note that I will cover the broad market environment on Friday. This will include updates for the Index and Sector Breadth Models, analysis for SPY, a check on the credit markets and a Fed update. I ran out of time with the shortened week to revisit the Weighted Average Stochastic Score (WASS) so this will be covered next week.

GLD and TLT are Still Overall Leaders

We will start out with the 20+ Yr Treasury Bond ETF (TLT) and Gold SPDR (GLD) because they are in uptrends and two of the strongest ETFs in the market overall. Despite uptrends, they are not immune to volatility and risk here also remains above average. The first chart shows TLT above the rising 40-week SMA and fairly close to its 52-week high. Note, however, that the PPO(4,40,0) moved above 10% in early March and TLT is still quite extended.

The next chart shows GLD hitting a new high in mid February and then turning volatile the last seven weeks. The weekly PPO(4,40,0) exceeded 8% for the third time in four years and this denoted an overextended condition. GLD is not overextended anymore and in an uptrend overall, but volatility and risk are above average.

Unlimited QE Lifts LQD and MBB

The Corporate Bond ETF (LQD) and Mortgage-Backed Securities ETF (MBB) were pummeled in early March as credit scares hit the bond markets. Bonds recovered in the second half of March as the Fed started unlimited QE and unlimited bond purchases. This stabilized the credit markets and this is positive overall. LQD remains below its 40-week SMA, while MBS fully recovered with a new high last week.

The middle window shows the 70-week Fast Stochastics, which extends back to December 2018. This indicator measures the current price relative to the high-low range over the last 70 weeks. In particular, I am interested in the March low for this indicator because it shows me which ETFs held their December 2018 lows. The indicator dipped to 6 for LQD because it did not hold the December 2018 low. In contrast, this indicator held above 60 for MBB.

QQQ and Tech ETFs Hold Up Well

ETFs that held above their December 2018 lows showed less weakness on the price charts, which can be translated into relative chart strength. As noted above, this can be quantified using the weekly Fast Stochastic (70,1). The chart below shows QQQ plunging below the 40-week SMA and exceeding the 61.8% retracement, but holding well above the December 2018 low. Notice that Fast Stoch held above 20. I also added some subjective trendlines to draw a rising channel. Thus, one could still make the argument that QQQ is in a long-term uptrend. Hell, most major index ETFs are in long-term uptrends if your lookback period is long enough!

The bottom indicator window shows 10-week Fast Stoch to measure the retracement over the last three weeks. This indicator shows the level of the close relative to the high-low range back to mid February. QQQ returned to the 40-week SMA and retraced a little less than 50%. This is reflected with the 10-week Fast Stoch, which is at 49.

Before thinking that I am bullish on QQQ, note that I am bearish on the broader market and I view the bounce over the last three weeks as a bear market bounce. QQQ may hold up better than the broader market, but it will not be immune to broad market weakness.

XLU Hits 50% Retracement, BUT …

The Healthcare SPDR (XLV), Utilities SPDR (XLU) and Biotech ETF (IBB) hit the 50% retracement level with strong bounces. Even so, all three recorded 52-week lows in March and are below their 200-day SMAs. XLV and XLU are below their falling 200-day SMAs. Also notice that RSI reached the danger zone on Tuesday and all three turned back on Wednesday. XLU led with a whopping 6% decline. Even Utilities are not safe.

IBB Surges within Range

The Biotech ETF (IBB) shows long-term relative strength and short-term absolute strength. First, note that it held the December 2018 low (less weakness). Second, notice that the ETF exceeded the 61.8% retracement and 10-wk Fast Stoch hit 65.63 (absolute strength). This was one of the stronger oversold bounces over the last three weeks. Even so, IBB remains locked in a trading range since September 2018. The ETF is now in the upper half and I do not see a clear uptrend or a bullish setup on this chart. Have to pass on this one too.

Chinese ETFs and the December 2018 Lows

Covid-19 began in Wuhan and the province just ended a 76 day lockdown. For comparison, NYC is entering day 21 of its lockdown. China is clearly further along than Europe and the US when it comes to the path of this virus. I also suspect that South Korea, Hong Kong and Taiwan are further along. Perhaps countries with long lockdowns, organized testing and robust tracking will emerge from this stronger than other countries.

The China-related ETFs are mixed right now with the China Large-Cap ETF (FXI) breaking below its December 2018 low and the China A-Shares 300 ETF (ASHR) holding above this low. The first chart shows FXI breaking below its 2018 lows and the Shanghai Composite ($SSEC) holding above these lows (so far). I am showing $SSEC to remove the currency effect, whatever it may be.

The next chart shows ASHR with a surge in early 2019 and than a choppy trading range over the past year. This could be a big correction after the 43% surge. Note that the ETF held well above the December 2018 low and is bouncing near the 61.8% retracement. Also note that ASHR is positively correlated to SPY. Even though the US and China are at different stages when it comes to covid-19, they are still quite dependent on each other.

Thanks for tuning in and stay safe!

-Arthur Hill, CMT
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