ETF Ranking and Grouping – Volatility and Risk Remain High as Bonds and Gold Perk Up

The broader environment for stocks is technically bullish, but risk remains well above average. The S&P 500 is its 200-day SMA and the 5-day SMA is above the 200-day SMA. The %Above 50-day SMA indicators surged above 80% to trigger bullish and the Index Breadth Model based on StockCharts data triggered bullish on June 5th with five of nine indicators on bullish signals. That’s the bullish part.

On the bearish side, new highs have yet to expand and the High-Low Percent indicators did not get above +5% the last two weeks. The S&P 500 %Above 200-day EMA (!GT200SPX) and S&P 400 %Above 200-day EMA (!GT200MID) exceeded 60% to turn bullish last week, but !GT200MID is already back to 54% and could flip because lots of stocks are near their 200-day SMAs. Only two of the eleven sector SPDRs recorded 52-week highs (XLY, XLK) and two key sector SPDRs are below their 200-day SMAs (XLI, XLF). Not one equal-weight sector recorded a 52-week high and five of eleven are below their 200-day SMAs.

As far as an objective approach to the stock market is concerned, the weight of the evidence is bullish and this means bullish signals/setups are preferred over bearish signals/setups. To identify pullbacks, chartists can look for RSI(14) dips into the 40-50 zone, falling flags and pullbacks to prior breakout zones. As far as broad market timing,  I will be watching the breadth models and the 5/200 day SMA cross for the S&P 500 (or SPY). A bearish signal in the breadth model or a bearish cross in the 5/200 day SMA would tilt the balance back to the bears. 

The chart below shows SPY with normalized Average True Range (ATR). This is ATR(22) divided by the 22-day SMA. Normalized ATR is red when above 1.5% and volatility is above average. The indicator is green when below 1.5% and volatility is below average. This is NOT a timing indicator. It just shows when volatility and risk are above average.

A Playable Pullback?

Should this decline represent a correction and not a resumption a bigger downtrend, where might we find support for a playable pullback? In normal times, a 3-5% pullback in SPY would be deemed playable. However, volatility is above average and this means we may get an above average pullback of 5-8%. A 5% pullback would extend to 307 and an 8% pullback would extend to 297. Elsewhere, the 200-day is around 301 and the flag breakout is around 296. Thus, a move into the low 300s could provide a playable pullback. In addition, an RSI dip into the 40-50 zone would signal a mild oversold condition.

Plotting Strength and Weakness

The scatter plot, which was created using Optuma software, shows the 60 core ETFs with StochClose (125,5) on the y-axis and RSI(14) on the x-axis. There are three groups: uptrend and oversold (green), uptrend and overbought (yellow) and downtrend and overbought (red). The tech-related ETFs dominate the upper right hand corner (yellow). Bonds, gold and Healthcare dominate the upper left (green). Energy and Finance dominate the lower third  (red).

ETFs Ranked by StochClose

The top twenty ETFs have been largely the same for several weeks now. Large-cap tech, Healthcare, bonds and precious metals dominate the top third of the list. Technically, the Gold SPDR (GLD) and Silver ETF (SLV) are out of the top twenty (21 and 22), but they are still in uptrends and leading overall. ETFs related to Energy and Finance are at the bottom of the rankings and remain in downtrends overall.

New High and Leading


Eight of the sixty ETFs in the core list recorded new highs this week and seven come from the Technology sector. XLY, the eighth, is being driven by Amazon (AMZN). The gains in these eight, and in most everything, since the March low are extraordinary. The Perfchart below shows that these eight are up between 44 and 55 percent the last 57 days. We do not need a momentum oscillator to figure out that these ETFs, while in strong uptrends, are extremely extended and ripe for a rest.

QQQ peaked on April 19th and the next chart shows performance since this peak. This is also a rough guide to show how far these ETFs are above their February highs. They are between 3% (XLK) and 9% (FDN) above these highs. XLY fell back the last two days and is back below its February high. 

We really do not need charts for these ETFs because they are all very overextended and ripe for pullbacks. A mild 25% retracement in QQQ would extend to the 225-228 area (green zone). Such a move seems mild relative to the prior advance, but it would still represent a 9 percent decline.

Consolidating after 52-week High


ETFs in the second group stalled after hitting new highs. HACK stalled for just a week, but the others stalled for several weeks. A consolidation after a strong advance and new high is a bullish continuation pattern. It represents a rest within the bigger uptrend. Sometimes there is a dip below the consolidation low, but this often proves to be a head-fake that creates a mild oversold condition. This is a bullish mean-reversion setup.

The first chart shows IBB going from one of the most exciting ETFs to one of the most boring as prices traded within a 10 point range the last four weeks. The lower window shows BandWidth hitting its lowest level since January. This means the Bollinger Bands narrowed considerably and volatility contracted. Bollinger theory suggests that we expect a volatility expansion and a breakout would obviously be bullish. I would also view a dip into the green zone as a bullish mean-reversion opportunity.

Imagine you are the world’s most powerful central banker with the world’s reserve currency and gold surges after your policy statement. Well, that is what happened to Powell on Wednesday. Without going into the details of unlimited QE etc…, the Gold SPDR (GLD) chart sports a bullish continuation pattern as prices traded within a 10 point range the last eight weeks. BandWidth narrowed, but did not reach mid February levels. Nevertheless, it is a bullish consolidation after a strong advance and new high. The surge off support and momentum thrust point to a breakout and continuation higher.

Above 200-day, Below Feb High and Short-term Breakout


ETFs in group three are leading because they are above their 200-day SMAs and sport short-term breakouts. They are in a lower group because they did not record 52-week highs in May or June. The first chart shows the Healthcare SPDR (XLV) coming close to its February high in late April and then moving into a consolidation. An Ascending Triangle of sorts formed and the ETF broke out over the last two weeks. Even though we have yet to see much follow through, the breakout is still valid and bullish.

The Medical Devices ETF (IHI) sports a similar pattern with a triangle breakout two weeks ago.

Correction After Surge


The 20+ Yr Treasury Bond ETF (TLT) is also in corrective mode. Instead of a flat consolidation, TLT fell back with a decline that started slowly and then accelerated. This brings up an important aspect of technical analysis. We often see reversals soon after an extended advance or decline accelerates. TLT was oversold by most metrics on June 2nd and the decline was still relatively tame (-6% in six weeks). TLT then fell 3.5% in 3 days and was down over 6% at Friday’s low. Downside price action accelerated right before the ETF forged a four-day reversal.

Also notice that the Inflation Protected Bond ETF (TIP) held up quite well with a triangle consolidation. TIP is breaking out of this triangle with a surge the last three days and RSI bounced off the 40-50 zone.

Above 200-day, but below February High


ETFs in the next group are between a rock (above 200-day) and a hard place (below February high). They are in uptrends since late March, but the uptrends are quite extended and the long-term trends are questionable. Long-term, they get the benefit of the doubt as long as the 200-day SMAs and short-term support levels hold. In fact, some of these ETFs may be candidates for mean-reversion bounces should they pull back.

The first chart shows ITB with a massive advance off the March lows. The green zone marks a possible reversal zone to watch on a pullback. A pullback to the 38 area would retrace 38% of the March-June advance and a pullback to 40 would retrace 61.8% of the May-June advance. Broken resistance also turns into support in the 38-39 area. Thus, a pullback to this zone plus an RSI dip to the 40-50 zone could set up a bounce.

Using this same logic with the Mobile Payments ETF (IPAY), a pullback to the 44-45 area could set up a bounce.

Close to 200-day


ETFs in the next group sport flag/wedge breakouts in late May and they are close to their 200-day SMAs with the recent advance. Frankly speaking, chartists can make an argument either way (bullish or bearish). I will base a bullish stance on the most recent breakouts in late May.

Back below 200-day


Now we get to the lagging end of the market. With the exception of the Preferred Stock ETF (PFF), ETFs in this group poked their head above the 200-day SMA and then moved back below with a sharp decline on Wednesday. IJR fell 3.64%, XLI dropped 2.39% and FCG plummeted 7.27%.

The first price chart shows IWM with a gap above its 200-day last Friday and a sharp decline below its 200-day on Thursday. IWM forged a 52-week low in early March and remains well below its February high. This means the advance off the March lows could still be one hell of a counter-trend bounce. A bearish wedge could be taking shape, but the trend is up as long as the wedge rises. The green zone marks first support to watch on a pullback.

The next chart shows the Industrials SPDR (XLI) moving back below its 200-day SMA after a 32% advance in 17 days. It is an impressive advance on its own, but this kind of price action is not normal. At the very least it is a testament to elevated volatility and risk.

Below 200-day with Normal Retracement Bounce


EFTs in this next group led the bounce over the last three to four weeks, but they are lagging over the last three to four months. Which timeframe is more important? All are below their 200-day SMAs and their retracements are still normal for counter-trend bounces. Most retraced around 61.8% of their prior decline. In contrast, QQQ hit a new high, SPY moved well above the 61.8% retracement and even IWM broke its 200-day SMA for a few days. These ETFs did none of the above and are lagging overall.

The first chart shows the Finance SPDR (XLF) with a 32% advance from mid May to early June and a 52% gain from late March to early June. Even with these gains, the ETF did not get above its falling 200-day SMA. XLF is still in a long-term downtrend. Chartists interested in a short-term playable pullback can watch broken resistance in the 23-24 area for possible support.

The next chart shows the Aerospace & Defense ETF (XAR) with possible support in the 82-85 area.

Below 200-day with Shallow Retracement Bounce


And finally, the last two ETFs are well below their 200-day SMAs and their retracements were shallow (less than 50%). The chart below shows the Oil & Gas Equipment & Services ETF (XES) with a 17-day 85 percent advance that fell well short of its 200-day SMA.

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
Choose a Strategy, Develop a Plan and Follow a Process

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