Grouping and Ranking Core ETFs – Broad Strength in Equity-Related ETFs and a few Pullbacks

There are plenty of strong uptrends in the core ETF list. In fact, 50 of the 60 ETFs in this core list are in uptrends of some sort. The S&P 500 SPDR (SPY), Nasdaq 100 ETF (QQQ) and Technology SPDR (XLK) are in group 1 and in the strongest uptrends. Large-caps and large-cap techs are still the strongest overall. ETFs in groups 2, 3 and 4 are also quite strong as all of them recorded new highs in December. Frankly, I am splitting hairs trying to rank the ETFs in the top four groups.

ETFs in group 5 are rather interesting because they pulled back within their uptrends. These are not drastic pullbacks, but rather short pullbacks that lasted 3 to 10 days. These pullbacks created short-term oversold conditions that could give way to a bounce. The Cloud Computing ETF (SKYY) and Cyber Security ETF (HACK) were placed in group 6, but they could also fit into group five with their short-term bullish continuation patterns. Again, this is a hair splitting exercise.

Elsewhere, ETFs in group 7 broke out of falling wedge patterns in December. These ETFs include the precious metals and REIT ETFs. It is not often that we see gold and REITs with similar patterns. Keep in mind that I am not looking for the reasons behind the move. Instead, I am matching up the charts patterns and grouping similar setups. I am also watching ETFs in group 8 because they are correcting/consolidating within bigger uptrends and could be poised to end these corrections.

Only ten ETFs are classified in downtrends (groups 9 and 10). The energy-related ETFs in group 9 surged in December, but are still in long-term downtrends and lagging over the last three to six months. Two bond-related ETFs and the Dollar Bullish ETF (UUP) are in group 10 because they are seriously lagging the last three to four months.

ETFs to Watch

  • ITB is putting everyone to sleep with an extended consolidation.
  • HACK formed a short-term bullish continuation pattern.
  • XME and XLB broke out of falling flag patterns.
  • XLY broke out of an Ascending Triangle in December.
  • GLD broke out of a falling wedge and could benefit from a weak Dollar.

ETF Grouping and Ranking

  • 1) Late Oct. breakout, Strong Extension and 52-wk High
    SPY, QQQ, XLK, SOXX, IHF, IEMG

  • 2) Early Nov. Breakout, Modest Extension and 52-wk High
    RSP, MDY, IJR, IWM, XLC, XLB, IGV, IHI, REM

  • 3) Slow and Steady Uptrends
    MTUM, USMV, XLY, XLP, VIG, HYG

  • 4) Falling Wedge breakouts and working higher
    SKYY, HACK, FINX, IPAY, TAN
  • 5) Short-term bullish continuation patterns
    XLF, XLV, BOTZ, KBE, KRE, KIE, IBB, XBI, XME, EFA

  • 6) Breakout and uptrend
    XLU, XRT, LQD
  • 7) Falling wedge breakouts in December
    GDX, GLD, SLV, PFF, XLRE, IYR

  • 8) Extended Consolidations or Correction (8+ weeks)
    XLI, ITB, XHB, ITA

  • 9) Support bounce and higher high, but below 200-day
    XLE, XOP, XES, FCG, AMLP, REMX

  • 10) Downtrends and lagging
    AGG, TLT, UUP, MJ

Late Oct. breakout, Strong Extension and 52-wk High

SPY, QQQ, XLK, SOXX, IHF, IEMG

ETFs in group 1 recorded 52-week highs in late December and sport some of the strongest uptrends in the core ETF list. These ETFs were up from 10% (SPY) to 25% (IHF) in the fourth quarter. The only negative is that they are looking a bit extended after big runs. However, keep in mind that it takes strong buying pressure to become overextended (overbought).

The first chart shows QQQ with a 12% gain in the fourth quarter and RSI exceeding 80 for the third time this year. RSI exceeded 80 on March 21st, April 23rd and December 26th (yellow lines). Notice how QQQ fell for two days in March and then moved to new highs in early April. The correction did not unfold until RSI moved above 80 for a second time. We could be in for a similar occurrence here in January as RSI dipped back to 71 on Monday.

I put the Core Emerging Markets ETF (IEMG) in this group because it surged in early December and recorded a 52-week high in late December. IEMG is up around 15% since mid October and benefitting from weakness in the Dollar, which has been falling since early October.

2) Early Nov. Breakout, Modest Extension and 52-wk High

RSP, MDY, IJR, IWM, XLC, XLB, IGV, IHI, REM

ETFs in group 2 are in strong uptrends and also recorded 52-week highs in late December, but they are just not quite as strong as those in group 2. In particular, they broke out in early November and did not really extend higher until December. Nevertheless, they did break out, these breakouts did hold and they hit new highs in late December. Clear uptrends.

The first chart shows the Russell 2000 ETF (IWM) breaking out in early November and then testing this breakout in early December. The gap-surge off the breakout zone in early December signaled a successful test of the breakout and the new high affirms the overall uptrend.

The Materials SPDR (XLB) broke out in November, tested the breakout zone in early December with a falling flag and broke out of this flag in mid December. The ETF finished the year close to a 52-week high and is showing some leadership the last four weeks. Note that the big chemical stocks dominate XLB and this is a play on that industry group (LIN, APD, ECO, DOW, DD, PPG, LYB).

The Medical Devices ETF (IHI) broke out in early November, hit a new high in mid November and extended higher the last six weeks. This extension is not as strong as that seen in QQQ, but IHI is clearly in a strong uptrend and continuing to lead.

3) Slow and Steady Uptrends

MTUM, USMV, XLY, XLP, VIG, HYG

ETFs in group 3 are in uptrends overall. Some have been trending higher for months (USMV, VIG), while others recently broke out of bullish continuation patterns in December (XLY, HYG). The first chart shows the S&P 500 Minimum Volatility ETF (USMV) breaking out in mid November and working its way higher the last six weeks. The advance does not show the strongest momentum, but the ETF continues to record new highs and sports a leading chart.

The Consumer Discretionary SPDR (XLY) is a recent addition to the list with an Ascending Triangle breakout and new high in mid December. The ETF lagged from August to mid December because it traded flat when the broader marker (SPY) moved higher. XLY, however, was never in an actual downtrend because an Ascending Triangle was taking shape. The breakout signals a continuation of the bigger uptrend and opens the door to further gains.

Chartists interested in XLY need to watch Amazon (AMZN) because the stock accounts for 23.61%. Other top holdings include HD (9.88%), MCD (6.17%), NKE (5.23%) and SBUX (4.31%). I featured Amazon on December 20th with seven other stocks setting up as we head into 2020. AMZN broke out of a falling channel in January 2019 and broke resistance in March. This broken resistance zone turned into support (1700-1800) and held as AMZN traded in a narrow range from August to mid December. AMZN broke out two weeks ago with a move above the rising 40-week SMA and this bodes well for the stock, and XLY.

4) Falling Wedge breakouts and working higher

SKYY, HACK, FINX, IPAY, TAN

ETFs in group 4 broke out of falling wedge patterns in November and worked their way higher the last six to eight weeks. The post breakout extensions vary with the Cyber Security ETF surging to a new high in early December and FinTech ETF falling short of a new high. Nevertheless, the falling wedges were deemed corrections within bigger uptrends and the wedge breakouts signaled a continuation of these uptrends. Note that IGV was upgraded to group 2 because it recorded a new high in late December.

The first two charts show the Cloud Computing ETF (SKYY) and Cyber Security ETF (HACK) consolidating after their breakout surges (October to November). SKYY has a small Ascending Triangle working and a breakout would signal a continuation higher. HACK formed a possible pennant and a breakout would also signal a continuation higher. Also note that RSI(10) dipped into the 40-50 zone for SKYY and this represents a mild oversold condition. RSI dipped to 50 for HACK.

Even though the FinTech ETF (FINX) and Mobile Payments ETF (IPAY) have yet to record new highs, they both ended their corrections with breakouts in November and are trending higher. Both stalled in early December and RSI moved into the 40-50 zone to become mildly oversold. They both broke out of small consolidations in mid December and appear headed for new highs.

5) Short-term pullbacks or consolidations

XLF, XLV, BOTZ, KBE, KRE, KIE, IBB, XBI, XME, EFA

ETFs in group 5 pulled back over the last few days or formed some sort of bullish continuation pattern. The pullbacks range from 3 to 10 days and created mild oversold conditions (very short-term). For example, the Healthcare SPDR (XLV), Biotech ETF (IBB) and Biotech SPDR (XBI) have 3 day pullbacks, while the Regional Bank ETF (KRE) and the Bank SPDR (KBE) have 9 day pullbacks. These pullbacks could give way to bounces and a continuation higher.

The long-term patterns in this group are quite varied, but they are all in some sort of long-term uptrend. XLV surged some 17% from early October to late December and fell sharply on December 30th (-1.24%). KRE surged 7.5% from December 3rd to 10th and then corrected the last 9 trading days with a ~1.5% pullback. The Metals & Mining SPDR (XME) broke Double Bottom resistance with an 18% surge from early October to mid December and then formed a falling flag.  

6) Breakout and uptrend

XLU, XRT, LQD

ETFs in group 6 are quite varied. They are in uptrends, but did not record new highs in December. The Corporate Bond ETF (LQD) is the weakest because it did not follow through on its late November breakout and is weighed down by general weakness in bonds. The Retail SPDR (XRT) broke out of a triangle consolidation in December and is very close to a 52-week high. Strength in retail is positive for XLY because this industry group accounts for around 32% of the ETF, and this does not include Amazon.

The Utilities SPDR (XLU) is also quite strong and near a 52-week high. The ETF was lagging in early November, but bounced from oversold levels and extended on this bounce in December. The decline from early October to mid November did not form a nice falling wedge or channel, but it was clearly a correction within a bigger uptrend (says the hindsight indicator).

7) Falling wedge breakouts in December

GDX, GLD, SLV, PFF, XLRE, IYR

ETFs in group 7 broke out of falling wedge or channel patterns in December. They were lagging the broader market prior to these breakouts, but the patterns look like corrections within bigger uptrends. The Real Estate SPDR (XLRE) and REIT ETF (IYR) bounced near their rising 200-day SMAs and broke out, while the Gold Miners ETF (GDX) and Gold SPDR (GLD) held above their 200-day SMAs and broke out. The precious metals related ETFs have more potential simply because they also have more volatility, and risk. As far as I am concerned, we only need to analyze and take signals from GLD. GDX and the Silver ETF (SLV) will simply follow with more volatility.

8) Extended Consolidations or Correction (8+ weeks)

XLI, ITB, XHB, ITA

ETFs in group 8 are lagging the last six to eight weeks. SPY moved to new highs throughout December and these ETFs either traded flat (ITB) or corrected (ITA). The patterns over the last several weeks are still deemed corrections within a bigger uptrend because all four recorded new highs in October or November. As such, I would not read to much into relative weakness. The Industrials SPDR (XLI) is consolidating above its breakout zone and a small pennant formed the last two weeks. Watch 82 for a breakout.

The Home Construction ETF (ITB) has traded in a narrow range the last nine weeks and Bollinger Band Width is below 5 for the fifth time in 10 months. The consolidation is clearly wearing out its welcome, but ITB is no stranger to dull periods (see May to July). Overall, the bigger trend is still up and this is still deemed a bullish continuation pattern. The odds still favor an upside breakout and bullish resolution. Chartists looking for the early jump can watch 45 for a breakout within the consolidation.

The Aerospace & Defense ETF (ITA) has trended steadily higher since March and hit a new high in November. The decline from this high formed a falling wedge and this is viewed as a correction within the bigger uptrend. Based on this combination, bigger uptrend and correction, the odds favor a bullish resolution. ITA already got an oversold bounce in mid December, but did not breakout of the falling wedge. Watch 227 for the wedge breakout.

9) Support bounce and higher high, but below 200-day

XLE, XOP, XES, FCG, AMLP, REMX

ETFs in groups 9 and 10 are in downtrends of some sort. ETFs in group 9 are below their 200-day SMAs, while two of the four ETFs in group 10 are still above their 200-day SMAs (TLT, AGG). ETFs in group 9 are trending lower the last six months, but bounced with big moves in December. ETFs in group 10 are trending down since September and fell further in December. I upgraded the energy-related ETFs because of these bounces and downgraded the bond-related ETFs because of continued weakness (ditto for UUP).

The Energy SPDR (XLE) is perhaps the strongest (or was) in group 9 because it held its August low in early October and exceeded its 200-day SMA for a few days. The ETF fell back hard on December 30th, but is back near the wedge breakout and RSI(10) is mildly oversold in the 40-50 zone. These conditions could give way to a bounce.

10) Downtrends and lagging

AGG, TLT, UUP, MJ

The 20+ Yr Treasury Bond ETF (TLT) challenged resistance in early December and failed as it fell back towards the rising 200-day SMA. Money clearly moved out of safe-haven bonds in December and into riskier assets (stocks). The decline since September still looks like a correction within a bigger uptrend because it formed a falling wedge and retraced around half of the prior advance. However, the immediate trend is down as long as the wedge falls and this is one of the weakest ETFs in the core list.

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
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