Grouping and Ranking Core ETFs – Some Rotation Surfaces as Leaders Pull Back and Laggards Bounce

After a big advance in October and November, many ETFs finally succumbed and pulled back. Some of the leading ETFs weakened the last two weeks, while some of the lagging ETFs picked up the slack. The tech-related ETFs led the pullback the last eight days (FINX, IPAY, HACK, SKYY, IGV and FDN). Meanwhile energy and metals related ETFs picked up the slack with some nice bounces. XES and XME are up over 5% the last eight days, and GDX is up 2.33%.

I am not ready to call for a big rotation from tech to energy and metals. At this point, I view the pullback in the tech-related ETFs as normal after breakouts and sizable advances. Weakness in the Dollar is benefitting gold and foreign ETFs. GLD and GDX are close to wedge breakouts, but have yet to trigger. In contrast, the Core Emerging Markets ETF (IEMG) broke out this week.

ETFs to Watch:

  • The Consumer Discretionary SPDR (XLY) remains stuck in a consolidation with a large Ascending Triangle.
  • The Internet ETF (FDN) is holding support and its breakout for the most part. Both XLY and FDN could use some help from Amazon.
  • The Solar Energy ETF (TAN) broke out of its falling wedge last week and followed through on this breakout.
  • The Aerospace & Defense ETF (ITA) returned to the trend-mean and could be poised to bounce.
    The Home Construction ETF (ITB) is holding up quite well with an active pennant breakout.

Programming Note: I added a video to the article explaining the indicators and signals behind the Index Breadth Model. Click here for the article and video

ETF Grouping and Ranking

1) Held Breakout Zone and Hit 52-week High
    SOXX, EFA

2) New High and Leading Gainer, but Overbought
    XLV, IBB, XBI, IHF

3) Short-Term Consolidation above Breakout and near 52-week High
    SPY, QQQ, XLK, XLF, IHI, ITB, XHB

4) Tortoise Uptrend and near 52-week High
    USMV, XLP, KIE, ITA, VIG

5) Held Breakout Zone and near 52-week High
    RSP, MDY, IJR, IWM, XLI, XLC, XLB, BOTZ, KBE, KRE, REM

6) Breakout and Reversal
    TAN, XME, IEMG

7) Short-term Consolidation or Pullback after Breakout
    XRT, LQD, MTUM, HACK, SKYY, FINX, FDN, IPAY, IGV

8) Bullish Consolidation and Close to 52-week High
    XLY, HYG

9) Lagging, Lower High and Lower Low
    PFF, XLRE, IYR, UUP, XLU

10) Falling Wedge Correction (downtrend since Sept)
     GDX, AGG, TLT, GLD, SLV

11) Downtrends
     XLE, REMX, XES, MJ, FCG, XOP, AMLP

1) Held Breakout Zone and Hit 52-week High

  • SOXX, EFA

The Europe, Australasia and Far East ETF (EFA) and Semiconductor ETF (SOXX) jumped to the top spot with new 52-week highs this week. SOXX was featured last week with the bull flag taking shape and the ETF broke out with a gap on Friday. SOXX then followed through this week with further gains. A new high in SOXX is positive for Technology and the broader market. Keep in mind that flags can be tricky, as we saw with the flag breakouts and hard throwbacks in KRE and IJR recently.

RSI theory is not perfect and we need to remain flexible, especially when volatility ticks up a notch. Typically, the 40-50 zone represents a mild oversold condition for RSI(10) and the first place to prepare for a bounce. A dip below 30 represents an oversold condition and is the second place to prepare for a bounce. SOXX did not cooperate with the theory and instead bounced in the 30-40 zone. Notice that RSI dipped below 40 in early October and early December and then bounced. SOXX just wants to be different and we cannot expect the “theory” to match the reality every time. Here is a CandleGlance chart for the top ten stocks in SOXX.

The next chart shows EFA breaking out of a triangle consolidation in October, hitting a new high and holding this breakout the last five weeks. I drew flags on this chart and others in late November, but removed these annotations to focus on the bigger picture and allow for some wiggle room. The breakout is bullish, the broken resistance zone turns into support and this zone is holding.

2) New High and Leading Gainer, but Overbought

  • XLV, IBB, XBI, IHF

The Healthcare SPDR (XLV) is the leading sector over the last ten weeks (+13.72%), while the Biotech SPDR (XBI), Biotech ETF (IBB) and Healthcare Providers ETF (IHF) are the leading industry-group ETFs (up over 20%). All three are long-term bullish, but very extended and ripe for a return to the trend-mean. The XLV chart shows the Raff Regression Channel (green lines) and the middle line is a linear regression, which acts as the trend-mean. A move back to the 95 area would put XLV near the trend-mean and provide the setup for a bounce. The other tactic would be to wait for RSI(10) to dip into the 40 area.

3) Consolidation above Breakout and near 52-week High

  • SPY, QQQ, XLK, XLF, IHI, ITB, XHB

The next group of ETFs broke out of multi-month consolidation patterns and held above their breakout zones the last few weeks. They are also very close to 52-week highs. I placed this group third because the ability to hold “above” the breakout shows more strength (as opposed to group 5).

The first chart shows QQQ breaking out in late October and holding well above this breakout zone during the early December dip. QQQ was one of the first to break out and the advance extended after the breakout. Notice that RSI theory is cooperating as RSI(10) bounced off the 40-50 zone the last six days.

The Medical Devices ETF (IHI) broke out in mid November and continued working its way higher the last three weeks. IHI experienced a steady stream of buying pressure from early October until now with a steady advance. It is also part of a leading sector: Healthcare.

The Home Construction ETF (ITB) is a bit different from the others in this group because it broke out in August, hit new highs into October and then stalled the last six weeks. ITB broke out of a small pennant in mid November and this breakout is holding for the most part. The trend is up and this breakout signals a continuation higher. Thus, I would expect further gains. A close below 44 would be short-term negative, but not enough to affect the long-term uptrend.

4) Tortoise Uptrend and near 52-week High

  • USMV, XLP, KIE, ITA, VIG

I am trying to quantify these ETF rankings in Amibroker and it is a challenge to capture the tortoise uptrends. These are slow momentum uptrends. Even though the current rankings are subjective, the Aerospace & Defense ETF (ITA) has been in the top half for a long time because of its steady uptrend. My ranking attempts in Amibroker fell short because ITA consistently finished in the 31 to 45 range (out of 60).

I continued to like ITA because of its slow and steady uptrend since March. The ETF simply produces higher highs and higher lows on a consistent basis. The green arrow line marks the trend-mean based on a linear regression. ITA fell back to the trend-mean as RSI dipped to the 30-40 zone. Yep, it looks like another ETF is going renegade on RSI theory. Anyhow, ITA has pulled back within the uptrend and shows signs of firming that could give way to another leg higher.

5) Held Breakout Zone and near 52-week High

  • RSP, MDY, IJR, IWM, XLI, XLC, XLB, BOTZ, KBE, KRE, REM

ETFs in the next group broke out of consolidation patterns and held these breakouts over the last few weeks. In contrast to QQQ above, these ETFs actually tested the breakout zones (as opposed to holding well above the zones).

Many of the charts in this group showed bull flag breakouts in late November. The flags have come and gone so I am removing them from the charts to focus on the bigger picture. The chart below shows IWM with a bullish breakout in the 158 area and this breakout holding after a little volatility.

Even though I have IWM and IJR below SPY and QQQ in the group rankings, note that IWM and IJR are up more than twice SPY and QQQ over the last three weeks. IJR and IWM are up around 2%, while SPY and QQQ are up around .80%. SPY and QQQ, of course, are stronger on the longer timeframes.

The Communication Services SPDR (XLC) broke out of its consolidation in mid November and held this breakout the last four weeks. This breakout is bullish and valid as long as the early December low holds (call it 51).

The Regional Bank ETF (KRE) broke out of a falling channel and forged a higher high with a surge above 55 in early November. The breakout zone in the 54.5-55 area turns into first support and this breakout is holding. Trading turned volatile the past five weeks, but the bigger picture remains bullish as long as this breakout zone holds.

6) Breakout and Reversal

  • TAN, XME, IEMG

The three ETFs in group six broke out recently and reversed downtrends of some sort. First, the Metals & Mining SPDR (XME) broke double bottom resistance and reversed a long-term downtrend. The chart shows XME with support in the 24.5 area, a flag breakout on 25-Nov and a Double Bottom breakout the last five days. This breakout effectively reverses a downtrend that started in January 2018. The resistance breaks combine to mark a support zone in the 27.4-28.3 area to watch going forward.

The Solar Energy ETF (TAN) broke wedge resistance and reversed a corrective downtrend. The chart shows TAN bouncing off the rising 200-day SMA and 38.2% retracement level the last three weeks. TAN broke the November resistance zone and this signals a continuation of the bigger uptrend. A close below the 200-day would call for a re-assessment.

The Core Emerging Markets ETF (IEMG) reversed its downtrend with a breakout in October and the breakout zone turned into support, which held in early December. Also notice that the decline retraced around 50% of the prior advance and RSI dipped into the 30-40 zone (just like SOXX and ITA). IEMG was set up for a bounce and broke out of a small wedge on Friday, and then followed through this week with a little help from the Dollar.

7) Short-term Consolidation or Pullback after Breakout

  • XRT, LQD, MTUM, HACK, SKYY, FINX, FDN, IPAY, IGV

ETFs in groups seven experienced breakouts recently and then consolidated or pulled back over the last week or two. Even though they are the last group with uptrends, they are by no means weaklings. The tech-related ETFs are in this group as most pulled back after breakouts in October-November. Some pullbacks are very mild (IGV, IPAY) and some are less mild (HACK and FINX). RSI(10) moved into the 40-50 zone for many of these ETFs and this is the first place to prepare for a bounce.

The Software ETF (IGV) fell sharply on 2-Dec and then firmed the last six days. RSI also fell into the 40-50 zone to become mildly oversold. Further down, broken resistance and the rising 200-day mark the next support zone in the 217-219 area. The Mobile  Payments ETF (IPAY) and FinTech ETF (FINX) sport similar setups.

The Internet ETF (FDN) is a bit different because it broke out late and fell right back into the trading range. The inability to hold the breakout is negative, but the bulls have not fully folded. There is a lot of support in the 132 area and RSI(10) is in the 40-50 zone. The breakout has a chance as long as support holds. Unsurprisingly, Facebook (FB), Amazon (AMZN) and Alphabet (GOOGL) are the dominant stocks here and account for 26% of the ETF. CSCO, CRM, NFLX and PYPL account for another 20%.

8) Bullish Consolidation and Close to 52-week High

  •  XLY and HYG

The Consumer Discretionary SPDR (XLY) and High-Yield Bond ETF (HYG) are the only two ETFs without clear uptrends or downtrends. Nevertheless, both have large Ascending Triangle patterns working the last few months and these are bullish continuation patterns. The higher lows show buying pressure coming in at higher levels and this is positive. The equal highs represent overhead support and a breakout would be bullish. Given the bull market environment and bullish patterns, I would expect a breakout at some point.

9) Lagging, Lower High and Lower Low

  • PFF, XLRE, IYR, UUP, XLU

ETFs in group nine are lagging the last few months with lower lows in November and lower highs taking shape. This group includes Utilities, REITs, the Dollar and the Preferred Stock ETF. XLU is holding up better than XLRE, but both XLRE and IYR broke pennant lines on Wednesday.

The Dollar Bullish ETF (UUP) bounced into November with a rising wedge that retraced around 61.8% of the prior advance. UUP broke the wedge line on 2-Dec and continued lower the last seven days. Even though the Dollar is above its rising 200-day, it is one of the weakest ETFs in this chart list. The rising 200-day, 61.8% retracement and broken resistance mark the next support zone in the 26.40 area.

10) Falling Wedge Correction (downtrend since Sept)

  • GDX, AGG, TLT, GLD, SLV

ETFs in group ten are lagging and in downtrends since September, but falling wedge patterns formed and these declines could be mere corrections after big advances. This group includes the bond and the precious metal ETFs. Note that stocks are in a bull market environment and this is usually less favorable for alternative and safe haven assets.

The Gold SPDR (GLD) hit a new high in early September and then retraced around 38.2% of the prior advance with a falling wedge. The pattern and retracement amount are typical for corrections within a bigger uptrend, but we have yet to see a convincing breakout. GLD firmed the last few weeks and found support around 137. Watch for a break above 141 to reverse the falling wedge.

The next chart shows the Gold Miners ETF (GDX) with three fan lines. Even though I drew these lines, I find them highly subjective and pretty much impossible to backtest. Regardless of the fan lines, GDX did firm from mid October to mid December and there is a clear resistance zone around 28. A breakout here would be bullish and argue for a continuation of the June-August advance.

The 20+ Yr Treasury Bond ETF (TLT) also sports a falling wedge and the ETF is near resistance. A move above 142 would trigger a breakout and open the door to new highs.

11) Downtrend

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

The remaining ETFs in group 11 are in long-term downtrends and the weakest of the list. The Energy SPDR (XLE) is perhaps one of the least weak because it has been consolidating since August. As the chart below shows, XLE held its August low in early October and bounced to the falling 200-day SMA. The ETF fell back after this bounce with a falling wedge and broke the wedge line four days ago. Here we go again…another short-term breakout (temptation) within a bigger downtrend.

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
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