ETF Ranking, Grouping and Analysis – Techs, Bond Proxies, Gold, the Dollar and Bonds Lead

Stocks extended their advance this week with most of the ETFs in the core list participating. The flag and pennant breakouts from early February worked as many moved sharply higher the last 12 days (February). QQQ, FINX, XLK, IPAY and IGV are up over 7% this month and leading. Tech, tech and more tech.

With these big moves and new highs, we are back in the monitoring phase for many ETFs. Said ETFs are both overbought and bullish. Note that the first overbought readings are not reason enough to become cautious (November, December). However, overbought conditions after an extended advance argue for caution. Caution is not bearish. It just means I am monitoring the uptrends and waiting for the next setups.

The bond proxies and bonds were strong again this week, even though XLU, XLRE and IYR fell back on Wednesday. I am also seeing some negative correlation between the Regional Bank ETF (KRE) and the 20+ Yr Treasury Bond ETF (TLT). KRE is down 4% this year and TLT is up 7.6%. Seems banks are not thrilled about falling Treasury yields. Utes and REITs, in contrast, are thrilled.

ETFs to Watch

  • The Biotech ETF (IBB) formed a tight flag and broke out.
  • The Regional Bank ETF (KRE) continues to underperform and RSI turned back down.
  • The Gold Miners ETF (GDX) broke out of a triangle (SLV also broke out).
  • MACD turned up for the Oil & Gas Equipment & Services ETF (XES).

Strong Extension after Pennant/Flag Breakout

SPY, QQQ, MTUM, USMV, XLK, XLC

Buzz Lightyear would certainly be jealous of QQQ as it stretches to infinity and beyond. With the latest move to new highs, QQQ is now around 20% above its rising 200-day SMA and up some 27% since October. Corrections have been limited to a few days and RSI(10) moved back above 70 for the third period since November. In fact, RSI has spent most of its time above 70 since early November. This is a classic example of a name becoming “overbought” and remaining so as a strong uptrend extends.

At this stage, I can count three legs higher since early October with the two circles marking brief, very brief, pullbacks. I could draw a subjective trendline extending up from the October low, but such a steep trendline is not reliable and certainly not tradable. The only thing to do at this stage is monitor the uptrend and consider trailing stop if you have long positions.

New High and Overextended

XLU, XLRE, IYR, SKYY, FINX, FDN, IPAY, IGV, REM, TAN, PFF

The current advance in stocks is a bit unusual because we are also seeing new highs and leadership from bond-proxies. The Cloud Computing ETF (SKYY), Software ETF (IGV), Utilities SPDR (XLU) and REIT ETF (IYR) hit new highs this week and these four sport some of the biggest year-to-date gains. SKYY (+13.73%),  IGV (+14.43%), XLU(8.65%) and XLRE (+6.65%).

Leadership from bond proxies is not necessarily negative for the broader market. The broader market will move higher as long as the majority of the big sectors are strong, and they are. Five of the big six hit new highs this month (XLC, XLI, XLF, XLK, XLY). The sixth, XLV, is very close to a new high.

Nevertheless, the charts for XLU and IYR look similar to those for IGV and SKYY. They are incredibly strong, almost too strong. The first chart shows XLU breaking out of a pennant last week and surging above 71 this week. The ETF was some 13% above its rising 200-day on Tuesday and fell back on Wednesday. As noted ad nauseum, flag and pennant breakouts require planning and attention. As short-term patterns, it is often prudent to close part of the position with a profit target and set a trailing stop for the remainder. This insures a winning trade by locking in some profit and setting a stop to prevent a loss on the entire position.  

The REIT ETF (IYR) broke out in late December, fell back in late January and zoomed higher in February. We have been monitoring the wedge breakout and I added a Chandelier Exit (22,3) as a potential trailing stop. This stop is 3 ATR(22) values below the 22-day high. This means the stop will rise when IYR hits new highs. IYR is clearly one of the leaders with a new high this week, but also quite extended after a 12% move the last two months.

IGV and SKYY are the second and third best performing ETFs in the core ETF list this year. TAN is the leader in ballistics with a 32% gain this year. Talk about out of control. As with IYR and XLRE, IGV also formed a falling wedge and the wedge breakout started the monster move. IGV broke out in early November and is up around 30% since early October. The pennant breakout is the last signal and the ETF is up another 7% in February. Everything looks bullish, but there is no setup here. IGV and SKYY are in the monitor and wait stage. Monitor the uptrend and wait for the next bullish setup.

New High

XLY, HACK, BOTZ, SOXX, IHF, GLD, $USD

An array of ETFs in the core list recorded new highs this week (28 in total). As you can see from the list above, the Consumer Discretionary SPDR (XLY), Semiconductor ETF (SOXX), Healthcare Providers ETF (IHF), Gold SPDR (GLD) and US Dollar Index ($USD) recorded new highs. Yes, GLD and $USD hit new highs and both are up year-to-date (3.7% and 6.2%, respectively). Throw intermarket analysis out the window and focus on the individual price charts.

The Cyber Security ETF (HACK) sports a big breakout in early January and a successful test of this breakout zone in early February. HACK formed an island reversal with a gap down, stall and gap up. The ETF then moved to new highs last week and this week. HACK can be erratic, but the overall trend is up and the ETF shows upside leadership with the new high this week.

The Semiconductor ETF (SOXX) is also leading with a new high this week. SOXX bottomed in early June and moved steadily higher the last eight months. The June trendline and early February low mark support in the 240-245 area.

The Gold SPDR (GLD) surged to a new high in early January, stalled for a few weeks and resumed its advanced with a huge move the last two weeks (+3.66%). This move set up with a test of the January lows and RSI in the 40-50 zone (mild oversold condition). Remember this setup for the future: a throwback and mild oversold condition within a strong uptrend.

Mean-Reversion Bounce and New High

RSP, MDY

The S&P 500 EW ETF (RSP) and S&P MidCap 400 SPDR (MDY) got big mean-reversion bounces this month and moved above their January highs. Both were hit pretty hard at the end of January and fully recovered. I marked a short-term support zone based on this week’s low for RSP. A close below this low would reverse the short-term upswing and call for a pullback. This is NOT a bearish setup. It is just a means to identify a short-term break down that could lead to a pullback. I also marked short-term support for SPY, MDY, IWM and IJR.

Steady Uptrends

XLI, XLP, ITB, XHB, KIE, XAR, IHI, VIG

The Industrials SPDR (XLI) recorded a new high last week and then fell back the last four days. Even though XLI is lagging this week, this is just a pullback within a bigger uptrend. Overall, XLI sports a steady, if not choppy, uptrend since the first higher high.

The Medical Devices ETF (IHI) broke out of a falling flag two weeks ago and extended on this breakout with a modest advance. A strong extension would be preferred, but the breakout is holding and remains bullish. A close below 268 would negate the breakout and argue for a corrective period.

Breakout            

GDX, AGG, TLT, LQD, SLV

The Gold Miners ETF (GDX) and Silver ETF (SLV) finally made their moves with breakouts this week. Both were setting up last week and these setups triggered with sharp advances on Tuesday. Both setups were based on a pattern within a pattern and RSI(10) in the 40-50 zone (mildly oversold). The triangle after the late December breakout is the big pattern for GDX and the consolidation near support was the small pattern. GDX broke out of this consolidation on Tuesday and broke out of the triangle on Wednesday. These breakouts build on the falling wedge breakout from late December and the bigger uptrend is resuming.

The 20+ Yr Treasury Bond ETF (TLT) broke out of a pennant formation with a surge the last four days. The wedge breakout in mid January ended the big correction and resumed the bigger uptrend. TLT was extended after the mid January surge and rested as RSI touched 50. This breakout ends the short pause and resumes the short-term uptrend.

Short-term Bullish Consolidation

XLF, XLV, XLB, IBB, XBI

ETFs in this group surged and then stalled. The Finance SPDR (XLF) and Biotech ETF (IBB) formed flags, while the Materials SPDR (XLB) formed a pennant. The short-term patterns in the Healthcare SPDR (XLV) and Biotech SPDR (XBI) are less clear, but they basically surged and than stalled a bit. This stall digested the gains somewhat and paved the way for a continuation higher.

The first chart shows the Finance SPDR (XLF) surging to a new high in early February and then consolidating as a flat flag formed. XLF is barely positive since mid December and still underperforming (thanks to KRE and KBE). Nevertheless, the flag is there and a breakout would be bullish.

IBB got a big mean-reversion bounce and then stalled just below its late December high. This is a picture-perfect flag, but that does not mean it will make a perfect trade. Biotechs are volatile and flags are tricky. Having made the disclaimer, IBB broke out of the flag with a surge on Wednesday and hit a new high intraday. I added a Chandelier Exit (22,1) as a possible trailing stop. Chandelier (22,1) seems too tight, while Chandelier Exit (22,3) seems to lose. Yep, it is a bit subjective, but at least it is a plan.

Mean-Reversion Bounce without New High

IJR, IWM, HYG, EFA, IEMG

ETFs in the next group surged with the market here in February, but have yet to record new highs. They are lagging a little, but not a lot. The Russell 2000 ETF (IWM) became oversold on January 31st and then surged around 5%. The swing is up and I am marking support at 166. Also notice that RSI is in the 50-60 zone. RSI is in a potential reversal zone and IWM has a possible lower high. A break below 166 would reverse this upswing.

Lagging Since December

XRT, KBE, KRE

Weakness in retail and banking stocks is partially to blame for relative weakness in small-caps. The Retail SPDR (XRT), Bank SPDR (KBE) and Regional Bank ETF (KRE) are down since Christmas and seriously underperforming the broader market. XRT had a potentially bearish wedge forming as RSI(10) hits the 50-60 zone. This did not pan out as XRT surged above 45.5 on Thursday.  

KRE surged for three days in early February and then turned back down the last two weeks. A small falling wedge is possible and a break above 56.8 would be bullish. For now, however, the evidence is negative with weakness since mid December and RSI(10) turning down from the 50-60 zone. Just as the 40-50 zone reflects a mild oversold condition that can lead to a bounce when the bigger trend is up, the 50-60 zone reflects a mild overbought condition that can lead to a decline when the bigger trend is down.

Downtrend

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

The last group of ETFs are in downtrends. The Oil & Gas Equipment & Services ETF (XES) may be ripe for a bottom pick as oil bounces and the ETF tests the November low. Oil bounced some 7% the last two weeks and is back above $50. XES has yet to really bounce and is still near the prior lows. MACD, however, turned up and is above its signal line. Overall, MACD is in negative territory and this means the 12-day EMA is below the 26-day EMA. The upturn in MACD means this difference is narrowing (less downside momentum). Prior MACD upturns in negative territory led to bounces. Plan the trade and then trade the plan!

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
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