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Grouping and Ranking Core ETFs – Stocks Show Vulnerability as Money Moves into Alternatives

The market finally showed a vulnerable side this week with a sharp pullback on Monday and Tuesday. A corrective period at this stage would be perfectly normal because stocks were up sharply in October and November.

We also saw several flag breakouts fail. These failures are not enough to affect the long-term trends, but they reflect short-term volatility that increases the odds of a correction.

While SPY and QQQ are up over the last three weeks, some key groups are not and are already correcting. Note that the Retail SPDR, Semiconductor ETF, Industrials SPDR and Consumer Discretionary SPDR are down over the last three weeks.

There are also signs that money is moving into stock alternatives. The Gold Miners ETF and 20+ Yr Treasury Bond ETF are up more than 3% the last three weeks.

There is a lot to cover every Thursday, but here are the ETFs to watch.

  • GLD, GDX and TLT are perking up and could be poised to break out of falling wedge patterns.
  • The mean-reversion bounce in XLU is holding strong.
  • The Dollar broke down as its mean-reversion bounce failed.
  • Weakness in the Dollar could help IEMG, which formed a bullish wedge.
  • The breakout in FDN is under threat as a rising wedge forms.
  • XME is one of the top performing ETFs the last nine weeks and a Double Bottom is taking shape.

ETF Grouping and Ranking

A little market turbulence made the grouping and ranking a big challenge this week. I could have made twenty groups, but decided to consolidate some and keep it to ten.

1) New High and Leading Gainer (XLP, XLV, IBB, XBI, IHF)

2) Short Pullback or Consolidation after New High (SPY, RSP, QQQ, MTUM, XLK, XLC, XLB, HACK, IGV, USMV, KIE, ITA, IHI, VIG, ITB, XHB, EFA)

3) Short-term Pullback after Correction and Breakout (FINX, IPAY, SKYY, LQD)

4) Failed Flag after New High and Held Flag Low (MDY, IJR, IWM, XLF, BOTZ)

5) Failed Flag after New High, but Broke Flag Low (XLI, SOXX, KBE, KRE)

6) Uptrend with Mean-Reversion Bounce Underway (XLU, XLRE, IYR, UUP)

7) Short-term Consolidation after Breakout (XRT, REM, IEMG)

8) Extended Consolidation (XLY, HYG, XME)

9) Extended Falling Wedge Correction (FDN, AGG, TLT, TAN, GDX, GLD, SLV)

10) Downtrend (XLE, MJ, FCG, XES, XOP, AMLP, REMX, PFF)

1) New High and Leading Gainer

  • XLP, XLV, IBB, XBI, IHF, IHI

ETFs that hit new highs this week are clearly leading in some way, shape or form. Even though the Finance SPDR (XLF) and Cyber Security ETF (HACK) hit new highs this week, I did not put them in the top group because they pulled back. I included the Healthcare SPDR (XLV) because it is up for the week and is less than a half percent from a new high. The Consumer Staples SPDR (XLP), Biotech SPDR (XBI) and Biotech ETF (IBB) also hit new highs.

The healthcare-related ETFs (XLV, IBB, XBI and IHF) are the runaway performance leaders since early October. IBB, XBI and IHF are up more than 20%, while XLV is up more than 10%. Even though they are clearly the leaders, they are simply too frothy for me to consider at this stage. XLV is up 11.76% over the last 45 days and this is the highest 45-day ROC since early March.

In contrast to healthcare-related ETFs, the Consumer Staples SPDR (XLP) is one of the ETFs that I am classifying in a “tortoise” uptrend. The former four are the hares in this race. The hares are the momentum ETFs that win the relative performance battle. The race equalizes when we look at the chart to compare price highs. XLP is up just 2% the last 45 days, but the chart sports a slow and steady uptrend. XLP consolidated within this uptrend and broke out two weeks ago. The ETF hit a new high this week to move back into the top tier.

The next chart shows the Medical Devices ETF (IHI) with a classic advance, consolidate and repeat sequence. IHI advanced 9 weeks at the beginning of the year and then consolidated for 13 weeks. The ETF then advanced 8 weeks and consolidated for 15 weeks. Notice that the consolidations are longer than the advances. This is pretty typical price behavior as price tends to consolidate for longer periods than it trends. The current advance is eight weeks old, but the breakout is relatively fresh and there may be more room to extend.

2) Short Pullback or Consolidation after New High

  • SPY, RSP, QQQ, MTUM, XLK, XLC, XLB, HACK, IGV, USMV, KIE, ITA, VIG, ITB, XHB, EFA

Group 2 is huge with 17 ETFs. This group hit new highs and then pulled back in some way, shape or form. ETFs in this group are leaders because they hit new highs over the last few weeks.

The first chart shows QQQ advancing over 10% from early October to late November and breaking out of a triangle consolidation. This breakout is long-term bullish, but QQQ became overextended short-term. The ETF pulled back the last few days and RSI(10) moved into the 40-50 zone. This is the first RSI area to expect a short-term bounce and the ETF obliged with a gain on Wednesday. There was a similar RSI setup in early March. I do not know if this setup will play out the same and would watch 200 for the early sign of a failure. Strong bounces do not look back and a move below 200 would argue for a deeper pullback towards the breakout zone.

I put the Software ETF (IGV) in this group as well because it hit a new high and pulled back with a sharp 1-day decline on Monday. 1-3 day pullbacks are short-term affairs that represent noise more than trend. The falling wedge breakout and new high are long-term bullish. The breakout zone and rising 200-day SMA mark first support to watch in the 215-220 area. A move into this zone and an RSI(10) dip to the 30 area would provide a true mean-reversion setup.

Next we have ETFs with pullbacks and tortoise uptrends. I call them tortoise uptrends because they are relatively slow and steady. The next chart shows the Aerospace & Defense ETF (ITA) with a zigzag advance from 200 to 235. The ETF is up around 15% since late March with a slow-and-steady uptrend. The pullback over the last two weeks is deeper than the pullback in SPY, but the uptrend is clear and I will be watching for the next short-term bullish setup. The second chart shows KIE with a similar uptrend.

Next up we have the Home Construction ETF (ITB) with a consolidation breakout that is holding for the most part. ITB advanced around 18%, stalled with a pennant and broke out two weeks ago. The ETF has not yet extended on this breakout, but it is holding for the most part and still bullish. A close below 44 would warrant a re-evaluation.

3) Short-term Pullback after Correction and Breakout

  • FINX, IPAY, SKYY, LQD

The next group features three tech-related ETFs that broke out of falling wedge corrections, but have yet to hit new highs. The Mobile Payments ETF (IPAY), FinTech ETF (FINX) and Cloud Computing ETF (SKYY) were lagging in mid October, but broke out and moved into the leadership group over the last six weeks. The breakout zones are holding and all three are above their rising 200-day SMAs. The breakout zones and rising 200-day SMAs mark the first support levels to watch should the pullback extend.

I put the Corporate Bond ETF (LQD) in this group because it also sports an uptrend into August, a correction into October and a breakout in late November. Instead of a falling wedge (price correction), LQD formed a Symmetrical Triangle (time correction). The triangle breakout signals an end to the correction and a resumption of the bigger uptrend.

4) Failed Flag after New High and Did Not Break Flag Low

  • MDY, IJR, IWM, XLF, BOTZ

Now we get into the finicky flags. The landscape was littered with flags and flag breakouts last week. Things changed as stocks fell pretty hard on Monday-Tuesday and jeopardized these breakouts. Group 4 highlights ETFs that held their flag lows after the flag breakout failed.

The Russell 2000 ETF (IWM) actually held up pretty well, and better than the S&P SmallCap 600 SPDR (IJR). The chart shows IWM breaking flag resistance and hitting a new high Thanksgiving week and then falling back this week. This pullback does NOT negate the new high or the channel breakout, which are long-term bullish. In addition, notice that IWM held just above the flag lows. The breakout failed because price moved back below the breakout level (intraday). While I do not want to play the tariff card, weekend sabre rattling probably had something to do with the overreaction. At this point, I think IWM looks fine short-term as long as 157 holds.

The Finance SPDR (XLF) is another ETF with a big surge, new high, flag breakout and failed breakout. The flag breakout failed to hold as price moved back into the flag zone and tested the flag low. The flag low held as XLF bounced on Wednesday. Sure is getting noisy. A close below 29.5 would break the flag low and argue for a deeper pullback.

5) Failed Flag after New High and Break below Flag Low

  • XLI, SOXX, KBE, KRE

Group 5 gets into the gray area of the ETF trends. These ETFs are in uptrends overall and recorded new highs in November. They are however, starting to lag and weaken over the last one to three weeks.

The Semiconductor ETF (SOXX) formed a flag in early November and a breakout that never took off. Instead, SOXX weakened the last three weeks and did not partake in the stock market advance during the second half of November. Even so, the bigger trend is up and SOXX hit a new high just three weeks ago. The current pullback is starting to look like a falling flag and this is a bullish continuation pattern.

The Industrials SPDR (XLI) tried to break out of its flag last week, but never got lift off and moved below the flag lows this week. A failed breakout that held the flag low is stronger than a failed breakout that broke the flag low.

The Regional Bank ETF (KRE) is becoming quite the mess again. The ETF broke out of a falling channel with a 13.4% surge and then corrected with a falling flag. A flag breakout was in the works last week, but the breakout failed and KRE moved below the flag low. Perhaps that flag was too small and tight. The smaller and tighter the pattern, the bigger the chance of whipsaw. The dashed lines mark a bigger flag taking shape as KRE bounces off broken resistance the last two days.

6) Uptrend with Mean-Reversion Bounce Underway

  • XLU, XLRE, IYR, UUP

Next we have ETFs in uptrends and with mean-reversion bounces underway. This means RSI(10) moved below 30 to become oversold within the bigger uptrend and the ETF then bounced. These ETFs are not leaders because they underperformed in November and remain below their highs.

The first chart shows XLU breaking its October lows in November and RSI(10) moving below 30. XLU was still well above the rising 200-day SMA and in a long-term uptrend. The ETF bounced to around 63 and then stalled the last few weeks. XLU held support during this stall and the oversold bounce is still in play. A close below this support zone would call for a re-evaluation.

The oversold bounce in the Dollar Bullish ETF (UUP) appears to be failing as UUP breaks below the mid November low. The rising wedge also reversed near the 61.8% retracement. As such, this looks like a continuation of the October decline and I would target a move to the 26.40 area. Weakness in the Dollar could benefit gold and emerging markets.

7) Short-term Consolidation after Breakout

  • XRT, REM, IEMG

ETFs in group 7 have emerging uptrends, but messy charts overall. I will highlight the Core Emerging Markets ETF (IEMG) because Dollar weakness could benefit and the ETF has a classic throwback in the works. IEMG broke out with a double digit surge and then corrected back to the breakout zone with a falling wedge. This is a classic throwback to the breakout and offers a second chance to partake. A falling wedge also formed and the decline retraced around half the prior surge. IEMG bounced the last two days and a breakout could be in the making.

8) Extended Consolidation

  •  XLY ,HYG, XME

I put the Consumer Discretionary SPDR (XLY), High-Yield Bond ETF (HYG) and Metals & Mining SPDR (XME) together because they are basically trend-less the last four to six months. XLY and HYG have large Ascending Triangles working, while XME has a Double Bottom working. Despite bullish continuation patterns at work, XLY are HYG are looking vulnerable to support breaks. XME, in contrast, looks poised for a resistance break. Also note that XME is one of the top performing ETFs over the last

9) Falling Wedge Correction

  • FDN, AGG, TLT, TAN, GDX, GLD, SLV

ETFs in Group 9 have falling wedges working over the last few months. The falling wedges in the bond and precious metal ETFs look corrective in nature. The Internet ETF (FDN) is in this group because it too has a falling wedge and the breakout is looking vulnerable. The chart shows FDN breaking out last week, failing to clear the 200-day and then falling sharply. A smaller rising wedge is now taking shape and this could be a bearish continuation pattern. A break below 132 would signal a continuation lower and be bearish for FDN.

The Aggregate Bond ETF (AGG) and 20+ Yr Treasury Bond ETF (TLT) remain within their falling wedge patterns as both backed off resistance from the November high. Nevertheless, AGG and TLT are still near their moment of truth and could break out. The chart below shows TLT surging some 25% and then retracing 50% of this advance with a falling wedge (two steps forward and one step backward).

TLT challenged resistance at 142 twice in the last two weeks and backed off. The third time could be lucky here so watch closely. A breakout at 142 would end the corrective phase and signal a resumption of the bigger uptrend. It has not happened yet, but such a move would show money moving into safe-haven assets and this could be negative for risk assets (like stocks).

The Gold SPDR (GLD) and Gold Miners ETF (GDX) have similar looking price charts with falling wedges. GLD is perking up with a break above the mid November high. This amounts to a short-term breakout within the bigger falling wedge and this is the early bullish signal. GDX also broke the late November high and the wedge line. The technical picture is improving for GLD and GDX.

10) Downtrend

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

ETFs in Group 10 are in downtrends and there is a new member: the Preferred Stock ETF (PFF). PFF was already lagging because it never really recovered from its early November decline. A lower high formed and the ETF broke below the prior lows this week. PFF also broke the 200-day SMA in the process.

Thanks for tuning in and have a great day!