ETF Ranking and Grouping – Rotation Takes Hold as Flag Breakouts Extend

We are seeing some rotation in the market as the leaders stall and the laggards get in gear. The leaders from mid March to mid May lagged over the last two weeks, while the laggards from this period led. ETFs related to bonds, gold, healthcare and technology led the market during the rebound period and were the first to move back above their 200-day SMAs. ETFs related to finance, industrials and consumer discretionary lagged on the rebound. Some crossed their 200-day SMAs recently (ITB, XRT) and some remain below (KRE, XAR, XME).

Charting the Rotation

The PerfChart below shows the percentage change from March 23rd to May 12th for twelve ETFs. SPY, QQQ, XLK, XLV, IBB and IHI led during this period with the biggest gains, IWM, XLF, XLI and KRE lagged with the smallest gains. Even though ITB and XRT have the biggest gains, they were not above their 200-day SMAs in mid May and were lagging from that perspective.

The second chart shows these same ETFs over the last eight trading days. Wow, what a difference. The first six are seriously lagging the second six. IWM is up 16% versus 6.5% for SPY. XLI is up 13.5% versus 4.24% for XLK. KRE is up 25.3% versus 2.3% for IBB.

As with all radical rotations, this is a double-edged sword. It is positive to see small-caps, retail, housing, banks and industrials leading because these groups are the most economically sensitive. These groups, however, still make up a minority of the broader market. Large-caps, techs, healthcare and communications services are the big sectors that drive the S&P 500.

Plotting Strength and Weakness

The scatter plot below shows StochClose on the y-axis and RSI(14) on the x-axis. Anything above 60 is in an uptrend and the size of the dots is based on StochClose values. Higher values (stronger uptrends) have bigger dots and lower values (downtrends) have smaller dots. ETFs related to gold, technology, bonds and healthcare are in the top quarter and leading (green outline). ETFs related to energy, finance, industrials, utilities and REITs are in the lower half and lagging overall (red outline).

RSI is above 65 for the 21 ETFs (blue outline) and above 70 for seven (ITB, XHB, XRT, MJ, SLV, BOTZ, XLY). Of the latter seven, all except MJ are above their 200-day SMAs and all except BOTZ are below their February highs. Strong RSI readings show strong upside momentum that can be bullish longer-term. Short-term, however, several ETFs are getting extended and ripe for a rest.

StochClose is the 125-day Stochastic based on closing prices. It shows the location of the close relative to the closing high and closing low of the last 125 days, which covers around 6 months. This is then smoothed with a 5-day SMA. StockCharts users can use the Fast Stochastic (125,5,1), but this version uses the intraday high and low to define the 125-day range.

ETFs Ranked by StochClose

The image below shows the top 28 ETFs (ranked by StochClose). I chose 28 to include SPY because its StochClose value is above 60, which implies an uptrend. The top 20 ETFs are still dominated by bonds, tech, healthcare and gold. There were big improvements in the Consumer Discretionary SPDR (XLY), Home Construction ETF (ITB) and Retail SPDR (XRT) this past week as their StochClose values exceeded 60.

SPY and StochClose

The next chart shows SPY with StochClose moving above 60 for the first time since late February. Shading turns green with a cross above 60 and red with a cross below 40. This is a trend-following indicator that will never catch the exact top or bottom and whipsaws are possible. For now, the indicator is bullish for the most important broad market ETF (IMHO).

The next chart shows SPY with the gap and flag breakout. This breakout is holding and bullish until proven otherwise. A close below 290 would negate the flag breakout, a close below 285 would fill the 18-May gap and a close below 280 would break support. Three strikes (breaks) and you are out.

The indicator windows show $SPX 20-day High-Low Percent, the percentage of 20-day highs and the percentage of 20-day lows. 20-day High-Low% turned bullish on 18-May with a move above +10% and the shading turned green. This move was powered by a surge above 30% in the percentage of 20-day highs.

The short-term timeframe seems more important than ever with SPY falling some 30% from February 19th to March 23rd and then rising over 30% the following five weeks. The flag started with the 29-Apr high and SPY is around 3.5% above this high, one month later. The 18-May gaps and flag breakouts are bullish, but keep in mind that flags and pennants are prone to failure even in a "normal" market environment. As such, short-term traders may consider profit targets or tight trailing stops.

New Highs and Leading


Four ETFs recorded new highs this week, three from the tech sector and the Biotech SPDR (XBI). The Cloud Computing ETF (SKYY) and Internet ETF (FDN) have been leading for some time. They were one of the first to cross back above their 200-day SMAs and exceed their 61.8% retracement lines. The chart below shows SKYY exceeding these in mid April and zigzagging to a new high the last five weeks. RSI has been above 50 since early April, but has yet to exceed 70. As with lots of ETFs, the mid May lows mark support.

Technically, XBI is stronger overall because it recorded a 52-week high in late April, much earlier than SKYY. Broken resistance turned into support as XBI consolidated above the breakout zone the last few weeks. Even though it is hard to draw a flag, this is basically a consolidation after a sharp advance and this makes it a bullish continuation pattern.

Above 200-day, but below February High


ETFs in the next leadership group are above their 200-day SMAs, but still short of their February highs. QQQ and several tech-related ETFs feature in this pack. The chart shows QQQ very close to its February high and in an upswing since late March. The higher highs and higher lows define this upswing and RSI has been above 50 since early April. Overall, there are three levels to watch for three strikes to call the uptrend out (reversed): close below 224, close below 216 and RSI below 50.

Above 200-day and Flag/Pennant Breakout


ETFs in the next group are above their 200-day SMAs and part of the leadership group. Instead of continuing higher in mid May, these ETFs corrected with either a consolidation (XLY, SOXX) or pulled back with a falling flag (AGG, LQD).  All four recently broke out of their consolidation patterns.

The charts below show the Consumer Discretionary SPDR (XLY) and Semiconductor ETF (SOXX) advancing into late April and stalling into mid May. XLY broke out on May 18th and SOXX followed suit a few days later. As with QQQ and XLK above, we can employ the three strike strategy to this uptrend. Watch the 18-May gap, the mid May low and 50 for RSI.

Recent Cross of 200-day, but below February High


The next foursome crossed above their 200-day SMAs this week. All four remain well below their February highs, but XRT and ITB are closer when considering ATR values. SPY and IPAY are more than four ATR(22) values below their February highs, while XRT and ITB are around three ATR(22) values below this high. The chart below shows IPAY with Keltner Channels (1,4,22) in gray. 1 is for the EMA, 4 is for the number of ATR values above/below the EMA and 22 for the ATR periods. A 1-day EMA is the same as the closing price.

The February high is just above the upper line of the Keltner Channel, which is four ATR(22) values above the close. The next chart shows ITB with Keltner Channels (1,3,22). ITB is around three ATR(22) values below the February high. Also notice that RSI exceeded 70 this week, which makes it one of the stronger ETFs over the last two weeks.

Above 200-day with Short-term Consolidation


ETFs in this group are above their 200-day SMAs and they were leading a few weeks ago. They have since stalled and formed consolidations within uptrends, which are bullish continuation patterns of some sort. The Healthcare SPDR (XLV) and Medical Devices ETF (IHI) peaked in mid April and stalled out over the last five weeks with pennant consolidations. The example below shows XLV stalling above the rising 200-day SMA and RSI holding above 50. A break out of this consolidation would signal a continuation higher.

The Gold SPDR (GLD) is a bit different because it broke out in mid May and then fell back into the pennant zone, which acts as support. GLD hit a new high last week and remains one of the leaders overall.

The 20+ Yr Treasury Bond ETF (TLT) sports a surge-pennant formation that is just a bit irregular, But hey, what chart isn’t looking irregular these days? Overall, I view the surge from 140 to 170 and consolidation over the last five weeks as something akin to a pennant. TLT is near the pennant lows and RSI is in the 40-50 zone. As with last week, this is a spot to watch for a bounce. A break out of the pennant would signal a continuation of the March surge.

Below 200-day and well below February High


Now we get to the long-term laggards with ETFs that are still below their 200-day SMAs. Most of the ETFs in the last three groups have flag breakouts of some sort working and are in short-term uptrends. Some are even quite close to their 200-day SMAs (RSP, MDY, USMV, XLB). The S&P 500 EW ETF (RSP), S&P MidCap 400 SPDR (MDY), S&P SmallCap 600 SPDR (IJR) and Industrials SPDR (XLI) feature in this group.

The first chart shows IWM with a gap and flag breakout. The ETF is up 7.5% since the flag breakout as the advance extended the last seven days. With IWM still below its falling 200-day SMA, this might be a good time to consider a profit target or tight trailing stop. The breakout zone around 130-132 turns into the first support zone to watch on a throwback. Such a dip could offer a second chance to partake. The gap zone marks first support and a close below 125 would reverse the upswing that has been in place since late March. The same setup is visible on XLI.

Strength in the High-Yield Bond ETF (HYG) could be part of the reason for strength in small-caps, banks and housing. The bounce in HYG means junk bond yields fell and this shows further improvement in the credit markets. HYG broke out of a wedge thingy and this breakout is holding, even though the ETF remains below the falling 200-day.

Below 200-day with Short-term Bullish Pattern


The defensive sectors dominate the next group. These ETFs led the market at the beginning of the surge (23-Mar to 17-Apr), but lagged over the last five weeks. They are below their 200-day SMAs as well. Nevertheless, their charts sport some potentially bullish setups. The first chart shows the Consumer Staples SPDR (XLP) with a falling wedge that retraced around 38%. XLP broke out with a bounce the last two days and there were two momentum thrusts as StochRSI moved above .80. The second chart shows the Real Estate SPDR (XLRE) with similar features.

Well below 200-day SMA


ETFs in this last group are the laggards overall. Many have flag breakouts working and are leading short-term, but they are still well below their falling 200-day SMAs and lagging longer term. The first chart shows the Regional Bank ETF (KRE) seeming to break down in mid May with a 21% decline in 10 days and miraculously recovering with a 29% surge the last nine days. Clearly this is not a dull market and volatility remains high. The gap, surge and flag breakout are bullish, but the long-term trend is still down.

The last chart shows the Metals & Mining SPDR (XME) extending its bounce with a new high for the upswing, which started in late March. The rising wedge and 50-61.8% retracement seem ominous as a bear market bounce, the immediate uptrend and 18-May gap dominate the landscape right now. A close below 19 would call for a reassessment of the immediate uptrend.

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
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