Playing Mostly Defense
The Composite Breadth Model is bearish so I am focused on ETFs that are not correlated to stocks (commodities), ETFs that are defensive (staples, utilities) and ETFs that are perhaps less correlated to stocks (agribusiness, steel, defense). Volatility is above average, the news flow is out of control and current conditions are challenging (war in Europe, world wide inflation, surging energy prices, Russian sanctions, bear Market Regime). As far as the war and Russian sanctions are concerned, the US is more insulated than Europe and US stocks are holding up better. Today’s report will focus on ETFs with uptrends and relative strength. I will also highlight two tech-related ETFs that are holding up relatively well.
Indicators versus Price Action
Indicators help us remove subjectivity and employ a more systematic approach. Well, at least until we look at the price chart and become confused. Visual price chart analysis is highly subjective and can sometimes contradict an indicator signal. We are seeing this now with wide price swings on some charts and whipsaws in the Trend Composite (125 days).
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
The chart below shows the Materials SPDR (XLB) with a choppy uptrend on the price chart and three versions of the Trend Composite (125 days, 200 days and 250 days). These cover approximately six, nine and twelve months. The price chart sports an uptrend because there are higher highs and higher lows (rising channel). The immediate price swing is down with a falling wedge taking shape since January. A break above Friday’s high would reverse this downswing.
As far as the Trend Composite, we could change the settings so it shows that we may “want” too see or so it jibes with the chart. The default timeframe for the indicators in the Trend Composite is 125 days, which covers six months.
We could extend the timeframe until the trend signal stays bullish, but changing the parameters to suit the situation is a dangerous game. In fact, it is a never ending game that will simply create more confusion. There is no such thing as the perfect indicator with the perfect setting. Keep in mind that we are also imperfect and we run the market! In the long run, we are usually better off deciding on a timeframe and sticking with that timeframe. This applies to all indicators.
The 125-day Trend Composite is the most sensitive because it is based on the fewest periods. The 250-day Trend Composite is the least sensitive because it covers the most periods (more smoothing). An increase in sensitivity results in timelier signals, but there are more whipsaws (bad signals). An increase in smoothing results in fewer whipsaws, but the signals lag more and the drawdowns are larger.
The ideal scenario is when price chart analysis aligns with the Trend Composite. Also consider that ETFs with a positive Trend Composite in 2022 are holding up much better than ETFs with a negative Trend Composite. The next chart shows the Infrastructure ETF (IFRA) with an uptrend on the price chart and a positive Trend Composite since mid October. IFRA is holding up better than XLB. The price charts are similar with choppy uptrends and a falling wedge in January-February. IFRA is also stronger short-term because it broke above the mid February highs already. Thus, the long-term trend is up and the downswing reversed.
ETFs Covered on Tuesday
I am not going to cover every uptrend in today’s commentary. Note that these charts were covered in Tuesday’s commentary (here).
- Utilities SPDR (XLU)
- Regional Bank ETF (KRE)
- Finance SPDR (XLF)
- Gold SPDR (GLD)
- Silver ETF (SLV)
- Cybersecurity ETF (CIBR)
- Clean Energy ETF (PBW)
- Lithium Battery Tech ETF (LIT)
- Strategic Metals ETF (REMX)
- Uranium ETF (URA)
- West Texas Intermediate ($WTIC)
- DB Energy ETF (DBE)
- Small-cap Energy ETF (PSCE)
- Steel ETF (SLX)
- Metals & Mining SPDR (XME)
Four Downtrend Signals in Finance-Related ETFs
The image below shows Trend Composite signals within the last five days. Click the “Recent Signal” column to sort and see these. Four finance-related ETFs triggered bearish signals. The Euro Financials ETF (EUFN) triggered five days ago, the Finance SPDR (XLF) triggered two days ago, as did KBWB and RYF. At the top of the table, we can see the new trend signals in the Aerospace & Defense ETFs, SLX and the 5-10 Year Inflation-Protected Bond ETF (STIP).
Uptrends in Defense and Agribusiness
There are a few uptrends out there and even a few that are confirmed with the Trend Composite. The first chart shows the Aerospace & Defense ETF (ITA) with a failed breakout in October when the Trend Composite was negative. There was a whipsaw from the Trend Composite in January and a bullish signal three days ago. This signal is accompanied by a big price breakout on the chart. Also notice that ITA formed higher lows when SPY formed lower lows (December to February).
The Agribusiness ETF (MOO) sports a choppy uptrend on the price chart and a positive Trend Composite since February 8th, which is the day before MOO broke out of the wide channel. MOO is volatile and price action is quite choppy, but so is the market this year. The trend is up and MOO is clearly a leader with new highs in February and March.
Base Metals Remain Strong
Zinc and aluminum continue to surge and drive the DB Base Metals ETF (DBB) to new highs. Copper, which accounts for a third of DBB, hit new highs in the futures market, but the Copper ETF (CPER) is dragging its feet a little. ETFs sometimes have tracking issues and do not always keep pace with the underlying commodity. The chart shows DBB with breakouts in December, a post-breakout extension and a parabolic type surge the last five days (+7.4%). The trend is up, but parabolic surges can be dangerous and lead to sharp pullbacks and volatility.
Note that you can chart copper futures (COPPER1!), aluminum futures (ALI1!) and zinc futures (ZINC1!) on TradingView (affiliate link here). These are symbols for the current contract continuous futures, but you can also chart the individual contracts. Aluminum is at a new high, zinc is close to its October high and copper surged some 6% this month.
The next chart shows the Copper Miners ETF (COPX) with its first higher high in October and higher lows since November. There was a wedge breakout in December and the Trend Composite turned positive on January 11th. After a hard throwback in late January, COPX turned back up and broke out to multi-month highs this week. ETFs with higher lows the last few months held up better than those that formed lower lows. ETFs trading above their January highs are leading.
DB Agriculture ETF Extends Higher as Sugar Perks Up
Wheat (ZW1!), soybeans (ZS1!) and corn (ZC1!) are powering the DB Agriculture ETF (DBA) and also contributing to recent volatility (blue oval). This is the market we live in right now. Volatility is high and is unlikely to subside anytime soon. The trend for DBA is clearly up and I do not see a setup. Strength in DBA could be a positive for the Agribusiness ETF (MOO).
Sugar (CANE) accounts for around 10% of DBA and sports a bullish setup on the price chart, though the Trend Composite remains negative. CANE caught my eye because the decline from the late November high formed a falling wedge and retraced around 2/3 of the prior advance. Thus, this looks like a correction within a bigger uptrend. Again, it is one of those declines that was enough to turn the Trend Composite negative, but still looks like a correction. CANE surged the last two days and broke the upper trendline. A break above the January high would forge a higher high and reverse the three month downtrend.
Defensive ETFs are Falling Less
The Consumer Staples SPDR (XLP) and Food & Beverage ETF (PBJ) are as defensive as it gets for stock-related ETFs. No matter what happens, we still need food, toilet paper and beer. XLP is down around 1.75% this year and PBJ is flat. These two would likely go down less in a bear market, but I am not sure if they would be immune to broad market weakness and the general rise in input prices (commodities). The charts below show both in uptrends and both with lower highs from January to February (red lines). They held up well so far and remain in uptrends.
Cybersecurity, Semis and Networking Hold Up
There are a few tech ETFs that are in downtrends, but holding up relatively well from late January until now. Their downtrend signals triggered in late January as the Trend Composite turned negative and remains negative. They are holding up relatively well because they did not break their October lows in January and held their January lows in February. The Cybersecurity ETF (CIBR) is the strongest of the three because it broke above its mid February high already. CIBR was covered on Tuesday.
The other two are the Semiconductor ETF (SOXX) and Networking ETF (IGN). The first chart shows SOXX testing the August and October lows in late January and February (green line). The swing is clearly down this year, but SOXX is trying to firm just above the Jan-Feb lows. A breakout at 480 would be short-term bullish. Note that this is a trading setup because the trend is down.
I am going with a line chart for IGN to filter out some of the noise. IGN hit a new high after a 22% surge into late December and then fell all the way back to 70. The decline did not break the autumn lows, but was sharp enough to turn the Trend Composite negative. The chart suggests that the uptrend is in place, while the Trend Composite suggests otherwise. IGN caught my eye because it firmed the last few weeks and held up better than the broader market. Is this going to be a successful support test or is a bear flag forming? A close below 70 would make this a bear flag and signal a continuation lower. A close above 74 would trigger a short-term breakout and be bullish.
Carbon ETF Becomes Negative Correlated with Oil
The Global Carbon ETF (KRBN) is suffering from the law of unintended consequences and second tier effects from surging energy prices. Energy prices are rising at such a fast clip that industrial users may be forced to use less (cut production). The chart shows KRBN falling back after the triangle breakout in mid February, but failing to stem the decline and plunging below the December lows this week. KRBN is down some 22% since the invasion and could continue moving opposite of energy prices.