Mkt/ETF Commentary – Defining Oversold, Working with Sentiment Indicators, High Beta vs Low Volatility (Premium)

Defensive Groups Leading

The broad market ETFs were hit with selling pressure on Wednesday with growth oriented groups leading the way lower. SPY fell 1%, QQQ was down 2.17%, the Semiconductor ETF fell 2.5% and the Russell 2000 Growth ETF was down 1.88%. In contrast, groups associated with the value end of the market bucked the selling pressure. The Utilities SPDR was up 2%, the Real Estate SPDR and Healthcare SPDR were up 1.5% and the Consumer Staples SPDR was up 1.3%. Again, we are seeing the defensive groups leading and holding up as the offensive groups lag. The PerfChart below shows the 6 day percentage change. Defensive groups are up and offensive groups are down.

Today’s report looks at ways to identify oversold conditions in SPY and sentiment extremes. We also analyze QQQ, XLK, the S&P 500 High Beta ETF, the S&P 500 Low Volatility ETF and the Clean Energy ETF.

About the ETF Trends, Patterns and Setups Report

This report contains discretionary chart analysis based on my interpretation of the price charts. This is different from the fully systematic approach in the Trend Composite strategy series. In this report, I am looking for leading uptrends and tradable setups within these uptrends. While I use indicators to help define the trend and identify oversold conditions within uptrends, the assessments are mostly based on price action and the price chart (higher highs, higher lows, patterns in play). Sometimes the chart assessment can be at odds with the indicators.

Oversold Conditions can Fluctuate

Indicators are largely dependent on the timeframe and the timeframe parameters control the sensitivity. Indicators with shorter timeframes will be more sensitive and trigger more signals. Indicators with longer timeframes will be less sensitive and trigger fewer signals. Unfortunately, there is no such thing as the perfect timeframe setting. Or the perfect indicator.

How long is a piece of string? It could be five inches or two yards. When is a stock or ETF oversold? It could be after a five day pullback or after a four week pullback. Indicators set on five periods (RSI(5)) will become oversold quicker and more often. Indicators set with ten or more periods (RSI(10) or CCI(20)) will require a deeper pullback and become oversold less often. The chart below shows RSI(5) becoming oversold four times from May to August and the these conditions led to bounces. RSI(10), in contrast, became oversold three times from September to February.

In a strong uptrend, as from March to August 2021, SPY became “oversold” after short declines that lasted just a few days. The first multi-week decline occurred from September 3rd to October 4th (2021). We then saw a consolidation from November 15th to December 23rd and a breakout between Christmas and New Year. This breakout ultimately failed as SPY fell around 13% from early January to early March (closing prices).

Condition, Setup and Trigger for SPY

The next chart shows SPY with StochRSI(10), the Momentum Composite and the Trend Composite. This is a basic mean-reversion type strategy that looks for oversold setups and short-term triggers when the trend is up. First, there is the condition: Trend Composite is positive and trend is up. Second, there is the setup: Momentum Composite dips to -3 or lower to become oversold. Third, there is the trigger: StochRSI(10) surges to .80 or higher. This is a short-term momentum pop. Chartists can also look for a bullish candlestick reversal or short-term breakout on the price chart for the trigger.

All strategies go through periods when they work and the portfolio grows, and periods when they do not work and the portfolio shrinks (drawdowns). As with the markets, there is a certain ebb and flow with a strategy. The green arrows show the triggers. The first three worked great. The fourth did not, but the fifth trigger worked well. The sixth, and last trigger, did not work.

Currently, the Trend Composite is positive, but the Momentum Composite has yet to provide an oversold setup because it remains at 0. I have also yet to see a tradable pullback pattern emerge on the price chart (falling flag, falling wedge, triangle).

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

Sentiment Indicators Not Yet Showing Fear

Sentiment indicators can be used to gauge extreme levels of fear or bearishness that could lead to a bounce. The chart below shows AAII Bears, the VIX and the CBOE Total Put/Call ratio. AAII Bearish sentiment is excessive when the percentage of bears exceeds 45% and the VIX shows excessive fear when above 30. The Put/Call Ratio is more nuanced. Either a surge above the upper Bollinger Band and/or a move above 1 shows strong put buying (fear). I am using a surge above the upper BBand.

The green lines show when two of the three indicators showed excessive bearishness or fear. Currently, AAII bears are below 30% and quite subdued, which means not much fear yet. The VIX is below 25 and also shows little fear. The Put/Call ratio remains elevated, but well below the upper Bollinger Band.

The VIX and the Put/Call ratio can be a challenge because their ranges are not static. Notice that the VIX has not been below 17.5 this year. It dipped below 17.5 several times from April to November last year. Similarly, the Put/Call ratio has not been below .70 this year. It dipped below .70 dozens of times from August 2020 to November 2021.

QQQ, XLK and Most Tech ETFs Still in Downtrends

The Trend Composite turned positive for SPY, but remains negative for QQQ, the Technology SPDR (XLK), the Communication Services SPDR (XLC) and the S&P 500 Growth ETF (IVW). XLK still accounts for 27.5% of SPY and XLC weighs in at 9.4%. This implies that QQQ stocks account for at least 35% of SPY. Weakness in these groups is and will weigh on SPY performance. The chart below shows QQQ hitting the potential reversal zone at the end of March and breaking short-term support with a gap on Wednesday. This reverses the short-term upswing.

The next chart shows XLK hitting resistance from broken support, the February highs and the 67% retracement. The ETF also gapped down and broke short-term support. This also reverses the short-term upswing and tech continues to lead on the way down (and lag on the way up).

The Trend Composite aggregates trend signals in five trend-following indicators: 5-day ROC of 125-day SMA, Bollinger Bands (125,1), Keltner Channels (125,2,125), CCI (125) based on Closing Prices and StochClose (125, 5). You can learn more about the Trend Composite here.

The Trend Composite is part of the TIP Indicator Edge Plugin for StockCharts ACP

Low volatility outperforming High Beta (SPHB, SPLV)

I am not a fan of the growth and value ETFs in general because they do not offer enough differentiation. We are often better off focusing sectors and industries associated with growth and value. Technology and Communication Services are the classic growth sectors. Utilities and Consumer Staples are the typical value plays.

The S&P 500 High Beta ETF (SPHB) and the S&P 500 Low Volatility ETF (SPLV) are two ETFs that capture these dynamics quite well. Tech and Communication Services account for 64% of SPHB, while Utilities and Consumer Staples account for 47% of SPLV.

The chart below shows the S&P 500 Low Volatility ETF hitting a new high in early January, correcting into early March and breaking out of a falling channel. The Trend Composite followed by turning positive on March 25th. Utilities, Consumer Staples, REITs and Healthcare are powering this ETF higher. Chartists looking for a mishmash of value can use SPLV. Chartists looking for more beta and differentiation can opt for the specific sector or industry group ETFs.

The second chart shows the S&P 500 High Beta ETF with a completely different picture. The red dashed lines show a downtrend over the last few months. SPHB did not exceed its February high and fell sharply the last six days. The Trend Composite also remains bearish.

Careful with Clean Energy ETF (PBW)

Even though clean energy is an investment theme to watch in the coming years, there could be some headwinds because of the stocks in the Clean Energy ETF (PBW). Small-caps are underperforming large-caps and high-beta is underperforming low volatility. PBW is listed as a small-cap growth ETF at It is also safe to assume that most stocks in PBW are high beta.

The broad market condition is an important consideration and the broad market trends right now are against small-cap growth. The price chart shows PBW with an upswing (green trendlines) within a bigger downtrend (blue trendlines). PBW exceeded its February high and performed better than most small-cap growth ETFs in March. I would, however, keep a close eye on this one because a break below 60 could lead to a test of the January-February lows.

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

Current Themes Working

There are a number of themes working right now and it is good to keep these in mind going forward. There will be zigs, zags and volatility along the way, but these themes could extend for several months, if not years.

  • Inflation, rising interest rates and falling bond prices
  • Material world favoring commodities and commodity producers
  • Accelerated move to clean energy
  • Increase in US energy production and exports (Oil, LNG)
  • Increase in defense spending in US and Europe
  • Cybersecurity as part of defense for governments and companies
  • Reduced-globalization as countries seek to source goods closer to home
  • US equities preferred over European equities (possibly Asian equities too)
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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