ETF Ranking, Grouping and Analysis – Dead Cat Bounces or More?

My, that was quick. A few days ago, Friday January 31st, to be exact, the S&P 500 SPDR and Russell 2000 ETF were down year-to-date. The S&P 500 had just suffered its worst weekly decline since late July (-2.14%) and the small-cap Russell fell 2.94%. In addition, seven of the twelve sector SPDRs were down year-to-date on January 31st (XLP, XLY, XLV, XLB, XLI, XLF and XLE). Flash forward a mere three days and the S&P 500 is up 3.38% for the week. Should this gain hold, it would be the biggest weekly gain since early June, which is when the May correction ended. Also note that eleven of the twelve sectors SPDRs are back positive for the year.

Does this sound the all clear? Hardly. Keep in mind that the last thing I want to do is “talk my book” and find reasons to substantiate my call for a corrective period. In this business, you can take a stance and then find supporting evidence if you look hard enough. Seek and ye shall find. Our job as analysts, chartists, traders and investors is to leave our biases behind and see what is really there.

I am keeping an open mind. SPY, QQQ and IWM are in uptrends overall and above their rising 200-day SMAs. Eleven of the twelve sector SPDRs are also in uptrends and above their rising 200-day SMAs. These eleven are also above their rising 50-day SMAs. XLE is the only sector below its falling 200-day and falling 50-day. Thus, the bulk of the long-term evidence is bullish.

Even so, I still think the broad market will enter a corrective period sooner rather than later. One never knows the length, duration or shape of a correction. It could be a sideways choppy trading range or we could even see a rotational correction where the leaders correct and the laggards pick up some of the slack. I think a corrective period is likely for the following reasons:

1) The market has yet to fully digest the gains from October to January.
2) Lots of ETFs are still very extended (see list below).
3) Volatility picked up significantly over the last three weeks.
4) Despite this week’s surge, the late January decline was the warning shot.
5) SPY is up 3.42% year-to-date but some 200 SPX Stocks are down.

22 ETFs are Up more than 4% the last 3 days
– IJR, IWM, QQQ, XLK, XLV, XLB, BOTZ, SOXX
– XRT, KBE, KRE, KIE, TAN, IBB, XBI, IHF, FCG
– XES, XOP, XME, REMX, IEMG

32 ETFs are Up more than 10% since Early October
– SPY, RSP, MDY, IJR, IWM, QQQ, MTUM, XLK, XLF, – XLI, XLC, XLV
– SKYY, HACK, FINX, FDN, – IPAY, BOTZ, SOXX, IGV, ITB, XHB
– KBE, KRE, REM, XAR, TAN, IBB, XBI, IHF, IHI, VIG

22 ETFs are more than 9% above their 200-day SMAs
– SPY, QQQ, MTUM, XLK, XLF, XLV, XLU
– SKYY, HACK, FINX, IPAY, BOTZ, SOXX, IGV
– ITB, XHB, XAR, TAN, IBB, XBI, IHF, IHI

The chart below shows QQQ with a 20+ percent advance over the last 90 days (about 4 months). The ETF is also 16.8% above its 200-day SMA and 15.38% above its 200-day EMA (PPO(1,40,0)). QQQ is the poster child for the ETFs that are overextended and ripe for a correction-.

ETFs to Watch

  • QQQ and SPY are extended again.
  • IGV, HACK and FDN Closed lower on Wednesday.
  • TLT is mildly oversold after a three day pullback.
  • GLD is mildly oversold and near a support zone.

Gaps, Short-term Breakouts and New Highs

SPY, QQQ, MTUM, USMV, XLK, XLY, SKYY, FINX, IPAY, IGV, TAN, VIG

Pennants, flags and other small consolidations formed with the pullbacks in late January and many ETFs broke out of these patterns with gaps and big moves the last three days. A dozen ETFs on the core list also recorded new highs after these breakouts. Note that these ETFs did not become oversold (RSI<30) last week and held up much better than ETFs that became oversold (RSI<30). RSI dipped to the 40-50 zone on many and this represented a mild oversold condition. Even though the consolidation breakouts, gaps and new highs are bullish. These ETFs are still quite extended on the four month timeframe. I am also a bit skeptical of pennant and flag breakouts that occur when an ETF is already extended. Thus, I remain cautious on these breakouts.

The chart below shows the Software ETF (IGV) with a gap, pennant breakout and new high. IGV is some 15% above its 200-day SMA and the 90-day Rate-of-Change exceeded 20% on Tuesday. While I do not want to read too much into one day, notice that IGV surged above 260 on the high and closed near the low of the day for a 1.43% loss on Wednesday.

Slow and Steady Uptrends

XLP, XLRE, ITB, XHB, KIE, XAR, IYR

There are still quite a few ETFs in what I would term slow and steady uptrends. These ETFs are simply working their way higher with pullbacks or consolidations along the way. The Home Construction ETF (ITB) hit a new high in October, consolidated for two months and broke out to new highs in January. This is one of the best performing ETFs in 2020. The second chart shows the Aerospace & Defense ETF (XAR) with a mild pullback in late January and a surge the last three days.

Gap and Short-term Breakouts

XLI, HACK, FDN, SOXX, IHI

The next group of ETFs broke out of short-term bullish continuation patterns as well, but did not record 52-week highs. Falling flags, flat flags, small wedges and pennants are typical for short-term bullish continuation patterns. Again, these ETFs were not oversold last week because RSI did not dip below 30. The breakouts are bullish for now, but I would exercise caution going forward. Note that the Cyber Security ETF (HACK) and Internet ETF (FDN) closed well below their highs and declined on the day. Throw in IGV and we are seeing early signs of cold feet in three tech-related ETFs.

The first chart shows the Industrials SPDR (XLI) hitting a new high in mid January, pulling back into late January and breaking out of a falling flag the last three days. It is a big impressive move that is bullish until proven otherwise. A close below 82 would negate the flag breakout and call for a re-evaluation.

The Semiconductor ETF (SOXX) is in this group, but I did not draw a falling flag or wedge because the lines were too tight. Nevertheless, we can see a new high in mid January, a sharp pullback into late January and a surge the last three days. While the surge is short-term bullish, notice that we are seeing a clear increase in volatility the last three weeks and this argues caution going forward. An increase in volatility may not be bearish in and of itself, but it is certainly not a bullish trait.

Failed Support Breaks and Mean-Reversion Bounce

RSP, MDY, IJR, IWM, XLF

Now we get to the ETFs with sizable mean-reversion bounces. I highlighted ten symbols that were oversold and ripe for a mean-reversion bounce in Saturday’s commentary, but I certainly did not expect this strong of a bounce. There is also a clear trading lesson here: one trader’s support break and bearish signal is another trader’s oversold condition and mean-reversion setup. This is what makes a market. Note that the mean-reversion signals are performing much better than the flag/pennant breakouts over the last nine months. The first chart shows IWM with two examples: failed flag, support break, oversold condition and mean-reversion bounce. Flag traders got whipsawed, while mean-reversion traders caught some good moves. RSI dipped below 30 three times since May and reached 30.73 on October 2nd.  

So what now? Damn good question! Overall, IWM is holding the early November breakout and above its rising 200-day SMA. The long-term trend is up and this still favors bullish setups over bearish setups. However, volatility reared its ugly head the last three weeks and we could be in for a bumpy ride.

The next chart shows the Finance SPDR (XLF) breaking “alleged support” at 30.5 and then surging back above 31. Again, the support break did not last long as the resulting oversold condition set up the mean-reversion bounce. This is the fifth oversold bounce in the last eleven months. The current bounce is a bit strange as XLF closed near the low on Monday and Tuesday, but near the high on Wednesday. Again, it could be a bumpy ride from here.

Big Mean-reversion Bounces

XLV, XLB, XRT, KBE, KRE, IBB, XBI, IHF

Now we get to the ETFs that were truly oversold last week and produced big mean-reversion bounces this week. ETFs in this group are up between 4.09% (XLB) and 7.78% (XBI) the last three days. Even without Monday’s gain, these ETFs are still up between 3.06% (XRT) and 5.74% (IHF) the last two days. As noted on Saturday, traders must plan their trade BEFORE taking the trade and then trade according to that plan. Most mean-reversion strategies use profit targets and exit without waiting for a downturn (no trailing stop). The first example shows XLV becoming oversold near the 38% retracement in the 99 area and surging to 103.76 on Wednesday. The gain from Monday’s high to Wednesday’s close is more than twice the Average True Range (22) and more than worthy of a profit target for a mean-reversion strategy.

The next chart shows the Regional Bank ETF (KRE) becoming oversold in late January and then continuing lower for a few more days. The ETF hit the rising 200-day and 50-61.8% retracement zone last week and surged some 5% this week.

Very Strong and Overextended

XLU, REM, PFF

The next ETFs are very strong overall, but looking quite extended. The Mortgage Real Estate ETF (REM) is up over 13% since early October and hit a new high on Wednesday. The Preferred Stock ETF (PFF) is up almost 4% since early December and near a new high. The lowly Utilities SPDR (XLU) is up over 8% from its early January low and near the upper line of a rising price channel.

Pullback after Breakout Advance

AGG, TLT, LQD, GLD, GDX, SLV

Stock alternatives, such as bonds and gold, suffered this week as the market found its risk appetite back. Note, however, that this move to “risk-on” is only three days and the prior move to risk-off was more pronounced (see oil and copper). In other words, this week’s decline in the 20+ Yr Treasury Bond ETF (TLT) and Gold SPDR (GLD) looks more like a normal pullback and the charts are still bullish overall. The first chart shows TLT holding above its rising 200-day SMA in late December and breaking out of a big wedge in January. The ETF was up over 6% in three weeks and ripe for a pullback. RSI is now near 50 and already close to the mild oversold zone (40-50). Thus, TLT could be ripe for a bounce again.

The next chart shows GLD falling back to the mid January lows, which offer some support. RSI moved into the 40-50 zone to become mildly oversold. Thus, there is a short-term mean-reversion setup in gold right now as it tests support and RSI hits the 40-50 zone. The Gold Miners ETF (GDX) is struggling to hold the small wedge breakout and is testing support from the January lows. Thus, GDX could be poised for a bounce. The Silver ETF (SLV) has a bull flag working and will likely follow gold’s lead.

Other

XLC, BOTZ, IEMG

ETFs in the “other” group are difficult to classify. The Communication Services SPDR (XLC) bounced, but the bounce over the last three days was relatively tepid. RSI is also in the 40-50 zone. The Robotics & Artificial Intelligence ETF (BOTZ) is all over the place, just like the Core Emerging Markets ETF (IEMG).

Downtrends

XLE, MJ, FCG, XES, XOP, AMLP, XME, REMX

The energy, metal and marijuana related ETFs are in the downtrend group. Note that Spot Copper ($COPPER) fell over 10% from 14-Jan to 5-Feb and Spot Oil ($WTIC) fell over 20% from 6-Jan to 5-Feb. Both recorded new 52-week lows on Tuesday. Natural Gas, Zinc and Aluminum also recorded 52-week lows recently. Perhaps it is darkest before the dawn, but I see downtrends for most energy or industrial metals related names.

The first chart shows the Oil & Gas Equipment & Services ETF (XES) hitting a new low at the end of January and then surging the last three days. This is not the kind of oversold condition or mean-reversion bounce that I would consider. The bigger trend is down with price below the falling 200-day SMA and 52-week lows in August, October, November and January. This means the bigger force is down and this is a headwind for bullish mean-reversion setups. As tempting as it seems to pick a bottom in these energy-related ETFs, I cannot justify interest because oil is in a clear downtrend and they are in clear downtrends.

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
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