ETF Trends, Patterns and Setups – High Beta vs Low Volatility, Defensive Sectors Lead, Gold Firms, ETFs with Gaps and Failed Gaps (Premium)

There could be a change afoot in the stock market over the past month (21 trading days) as money moves out of the riskier parts and into the more defensive areas. The Composite Breadth Model remains bullish overall and the 5-day SMA for the S&P 500 is above the 200-day SMA. Even though I have yet to get a bearish market regime signal, there is cause for concern with deteriorating breadth, a rotation out of riskier groups and a rotation into defensive groups.  Today’s commentary will cover these issues as well as some ETF charts.

December Scheduling

I need to adjust the commentary and video schedule in December to account for the holiday period, which has pretty much begun. I need to take the next two Saturdays off and the schedule will be as follows.

  • Tuesday 14-Dec: ETF Commentary
  • Thursday 16-Dec: ETF Commentary
  • Friday 17-Dec: Market Regime Update and Weekly Video
  • Tuesday 21-Dec: ETF Commentary
  • Wednesday 22-Dec: ETF Commentary
  • Thursday 23-Dec: Market Regime and Weekly Video
  • Friday 24-Dec: Christmas Eve (day off)
  • Saturday 25-Dec: Christmas Day (day off)

High Beta and Low Volatility Capture Risk Appetite

The list and PerfChart below show the 21-day Rate-of-Change for five high beta/risk ETFs, SPY, QQQ, XLK and four defensive ETFs. SPY and QQQ are pretty much unchanged, the high beta ETFs are down sharply and the defensive ETFs are up.

  • Online Retail ETF (IBUY) -20.53%
  • Clean Energy ETF (PBW) – 19.17%
  • FinTech ETF (FINX) -15.63%
  • Cloud Computing ETF (CLOU) -12.67%
  • Social Media ETF (SOCL) -11.38%
  • S&P 500 SPDR (SPY)  +.60%
  • Nasdaq 100 ETF (QQQ) +.43%
  • Technology SPDR (XLK) +4.22%
  • Consumer Staples SPDR (XLP) +3.19%
  • Utilities SPDR (XLU) +4.96%
  • Real Estate SPDR (XLRE) +3.49%
  • Healthcare SPDR (XLV) +2.03%

We can also see this performance disparity when comparing the S&P 500 Low Volatility ETF (SPLV) with the S&P 500 High Beta ETF (SPHB). The first chart shows SPLV becoming oversold in early December and surging to new highs over the past week. Low vol is strong and leading the market right now. The top four sectors are Consumer Staples, Utilities, Industrials and Healthcare.

The next chart shows SPHB with a decline since early November. High beta is lagging over the past month. The ETF surged with a gap last Tuesday, but there was no follow through as SPHB filled the gap with a sharp decline on Monday. Follow through with a break above last week’s high is needed to put high beta back on the bullish track. The top sectors are Technology, Consumer Discretionary, Finance and Energy.  

You can learn more about my chart strategy in this article covering the different timeframes, chart settings, StochClose, RSI and StochRSI.

The next charts show the four top sectors in the S&P 500 Low Volatility ETF (SPLV). The Consumer Staples SPDR (XLP) surged to a new high with a monster move the last eight days. The Utilities SPDR (XLU) surged as well and is close to a new high. The Real Estate SPDR (XLRE) hit a new high and the Healthcare SPDR (XLV) broke out of its triangle.

The Momentum Composite aggregates signals in five momentum indicators. RSI(10) is oversold below 30 and overbought above 70. 20-day StochClose is oversold below 5 and overbought above 95. CCI Close (20) is oversold below -200 and overbought above +200. %B (20,2) is oversold below 0 and overbought above 1. Normalized ROC (10) is oversold below -3 and overbought above +3. Normalized ROC is the 10-day absolute price change divided by ATR(10). -3 means three of the five indicators are oversold and +3 means three of the five are overbought.

The Momentum Composite and StochClose are part of the TIP Indicator Edge Plugin for StockCharts ACP. Click here for more details.

Strength in defensive groups is not necessarily bearish for stocks. However, this move towards defense is coming at a time when breadth continues to deteriorate, small-caps are underperforming and high beta groups are under pressure. The chart below shows the percentage of stocks above the 200-day SMA for the S&P 500, S&P MidCap 400 and S&P SmallCap 600. All three peaked in spring and fewer stocks participated in the November bounce. Currently, fewer than 50% of small-caps and mid-caps are above their 200-day SMAs.

SPY and QQQ are largely immune because they are dominated by large-caps, which are holding up for now. QQQ broke out with a gap last Tuesday and this gap is largely holding (green zone). This means it is bullish and has yet to be proven otherwise. QQQ fell back on Monday and a test of the gap zone is at hand.

You can learn more about exit strategies in this post,
which includes a video and charting options for everyone.

We can expect some fireworks in bonds, gold and the Dollar this week because the Fed policy statement is Wednesday afternoon. The only thing we can do now is analyze the charts as they are and refrain from Fed speculation. If speculating market moves based on the Fed statement, we must get two things correct. First, we must correctly predict the key points in the Fed statement. Second, we must predict the market’s reaction to these points. The odds of getting both right are not very high. The financial media usually looks at the market reaction and then finds a seemingly logical reason within the Fed statement. In other words, find the reason after the reaction.

Gold remains at an interesting juncture because there is evidence of a sloppy uptrend since March. GLD surged some 13% from early March to late May, corrected into September with a gap-laden decline and then broke out with an 8% surge in October-November. Thus, the higher low from spring to fall and wedge breakout argue for an uptrend, but this uptrend is far from consistent. GLD is at a potential reversal zone because it retraced around 2/3 of the prior advance with a decline back to the 165 area. The ETF firmed the last few weeks and a breakout at 168 would be bullish, provided we do not see another pop and drop.

I covered the yield curve, 10-yr Treasury Yield and banks last Thursday. The chart below shows the 20+ Yr Treasury Bond ETF (TLT) breaking out of a consolidation in early December and falling back below the breakout last week. I would not call this a “failed breakout”. Instead, I see a higher high from July to November and a sloppy uptrend since spring. The November lows mark key support and a break here would trigger a reversal.

There are a lot of ETFs with pullbacks from November to early December, up gaps on 7-Dec (last Tuesday) and no follow through. Many filled their gaps with sharp declines the last few days (IDRV, BOTZ, QCLN, XLE, XOP, GAMR, URA, ESPO). The inability to hold these gaps is negative and shows more risk aversion.

A few ETFs are stalling and holding their gap zones, but have yet to follow through (CIBR, IGV, ROBO, XME, COPX). A break above last week’s high would be bullish for these ETFs.

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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