Mkt/ETF Commentary – Retail Trends Lower, Finance Looks Vulnerable, Breakouts in Defense, Uranium and Steel (Premium)

More Bearish than Bullish

The Composite Breadth Model remains bearish and the S&P 500 SPDR is in a downtrend since the January breakdown. The S&P SmallCap 600 SPDR (IJR) held up a little better than SPY in January-February, but remains short of a resistance breakout that would negate the January breakdown. In short, the trends for the major index ETFs are down and the Market Regime remains bearish. This means there is a significant headwind for stocks and stock-related ETFs.

Today’s report will look at weakness in the equal-weight Consumer Discretionary sector and retail SPDR. I will also highlight some concerns with the Finance sector and regional banks. Finance is the second biggest sector in the S&P 500 (11.5%). Also note that bonds are surging in a flight to safety and yields are falling. We will then look at ETFs related to gold, silver, cyber security, defense, clean energy, metals, uranium, oil and steel.

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EW Consumer Discretionary and Retail in Downtrends

The EW Consumer Discretionary ETF (RCD) represents the most economically sensitive sector and the Retail SPDR (XRT) is a big part of this sector. Both are in downtrends and this is a negative for the broader market and the economic outlook. The chart below shows RCD with a breakout in October and a breakdown on January 19th. RCD bounced with the rest of the market in early February (bear flag) and broke down in mid February. The ETF broke the summer lows, the Trend Composite is negative and the trend is clearly down right now. The second chart shows XRT breaking down from a bear flag and continuing its downtrend.

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

Concern with Banks and the Finance Sector

The Finance SPDR (XLF) and Regional Bank ETF (KRE) are in uptrends overall, but both formed lower highs from January to February and dipped below their January lows last week (intraday). Their uptrends were already choppy and short-term relative weakness is a concern. The decline over the last seven weeks could be a falling wedge, which is a bullish continuation pattern. A break above the red trendline is needed to put this pattern into play. Separately, sanctions are creating a big headwind for banks with exposure to Russia and banks with exposure to banks that are exposed to Russia. This is not a Lehman moment, but it is a disruption and a headwind. Also keep in mind that the Market Regime is bearish and interest rates are falling.

We are in the fog of war and what you know/think is probably wrong. --Mike McKee (Bloomberg)

Bonds are Breaking Out

Even though stocks held up on Monday, money moved into safe-havens as the 20+ Yr Treasury Bond ETF (TLT) surged 2.2% and the Inflation-Protected Bond ET (TIP) surged 1.7%. Both charts show the Trend Composite in negative territory, but I am focused on the swings and the surge over the last two weeks reversed the downswing. The first chart shows TLT falling to the spring lows and breaking short-term resistance with a big move. This means money is moving into safe-haven bonds and interest rates are ticking down. The second chart shows TIP breaking out last week and continuing sharply higher on Monday. Note that these setups were shown in Thursday’s report.

The Utilities SPDR (XLU) is a bond-proxy because of its relatively high yield and stable-boring business. The Trend Composite has not been much help with whipsaws because of the wide swings over the last six months. On the price chart, I see an uptrend with higher highs and higher lows. The Jan-Feb decline was deep, but XLU held just above the Sep-Oct low and broke short-term resistance with a surge the last two days. This reverses the downswing within the choppy uptrend.

The Momentum Composite aggregates signals in five momentum indicators. RSI(10) is oversold below 30 and overbought above 70. 20-day StochClose is oversold below 5 and overbought above 95. CCI Close (20) is oversold below -200 and overbought above +200. %B (20,2) is oversold below 0 and overbought above 1. Normalized ROC (10) is oversold below -3 and overbought above +3. Normalized ROC is the 10-day absolute price change divided by ATR(10). -3 means three of the five indicators are oversold and +3 means three of the five are overbought.

The Momentum Composite and StochClose are part of the TIP Indicator Edge Plugin for StockCharts ACP. Click here for more details.

Gold and Silver Hold Uptrends

The Gold SPDR (GLD) remains a leader with its third breakout since April and a higher low from March to October. GLD broke out in April, fell back into October with a big wedge and broke out in October-November. The ETF then formed a triangle and broke out in mid February. This is a continuation breakout and the target is north of 180. The green dashed lines show a possible rising channel.

Silver is not as strong as GLD, but has a strong positive correlation to the yellow metal. SLV has a large double bottom working since September and a break above the November high would confirm this pattern. Short-term, SLV fell back sharply into early February, but held above its December low and broke short-term resistance on February 8th. Trading turned very volatile the last four days, but the short-term breakout is bullish and the Trend Composite turned positive.

Defense, Cybersecurity and Clean Energy

In addition to commodities, three groups are attracting strong buying interest the last few days. The cybersecurity ETFs (CIBR, HACK, BUG) represent the front line in the cyber war. The aerospace and defense ETFs (ITA, PPA, XAR) are benefitting from the prospects of more defense spending. The clean energy ETFs (ICLN, PBW, ACES, FAN, TAN) are attracting buyers because the move to clean energy could accelerate in the coming years.

The first chart shows the Aerospace & Defense ETF (ITA) with a long falling channel and underperformance in the second half of 2021. The ETF started to hold up better in 2022 as higher lows formed from December to January (green line). In contrast, SPY and other ETFs broke their December lows in January. ITA followed up on this relative strength with a massive breakout on Monday. This reverses the seven month downtrend and I would expect new highs in the coming days or weeks. Note that ITA was featured in the weekend video (51:35 mark).

Cybersecurity Leads with Tech Sector

The Cybersecurity ETF (CIBR) and other cybersecurity ETFs are leading tech because they are the only ones that broke their early February highs. Keep this metric in mind because the tech sector as a whole remains in bear mode. The chart below shows the Technology SPDR (XLK) breaking down in January, returning to broken support in early February and reversing at this resistance zone. A falling wedge may be forming, but the trend is clearly down and XLK is not anywhere close to its early February highs.

The chart below shows CIBR breaking down with the rest of the market in January, but showing some relative strength as the February low held the January low. SPY, QQQ and XLK, in contrast,  forged lower lows. This relative strength turned to absolute strength as CIBR broke resistance with a three days surge. Taking a reassessment based on this breakout, the Nov-Jan decline retraced 2/3 of the March-November advance with a falling channel. Both the pattern and retracement amount are typical for corrections within bigger uptrends. The breakout is bullish and CIBR is leading.

Note that the Trend Composite has yet to turn bullish and CIBR is up 11.61% the last three days. I estimate that a close above 52 is needed to turn the Trend Composite bullish. CIBR is still part of the market and part of the tech sector, both of which are in bear mode. Volatility is also above average. Thus, there could be some backing and filling or a short-term pullback. A falling flag or small wedge back to the 47 area would provide a better setup.

You can learn more about exit strategies in this post,
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Clean Energy ETFs Attract Buying Interest

There are quite a few clean energy ETFs, but they are positively correlated and pretty much move in the same direction (PBW, ICLN, ACES, FAN, TAN, PBD, QCLN). The PerfChart below shows the percentage price moves since the March 2020 low. The degree of movement is wildly different with PBW, TAN and QCLN (top three lines) showing the biggest moves and FAN showing the smallest move (magenta line).

The Clean Energy ETF (PBW) is an equal-weight ETF with some 79 stocks. This makes it a broad-based ETF that is not driven by market cap. The chart shows PBW advancing 500% to the February 2021 high and then falling 62% to the January 2022 low. The big pattern looks like a falling channel correction after a massive advance. There are three swings within this big channel (red/green/red) and the current swing is down. PBW showed some relative strength from January to February with a higher low and is challenging short-term resistance. A short-term breakout would reverse the downswing and provide the first bullish signal. Chartists looking for a long-term trend signal will have to wait for a break above 80.

Lithium and Strategic Metals ETFs Correct within Uptrends

Lithium-related stocks account for around 11% of the Clean Energy ETF (PBW). The chart below shows the Lithium Battery Tech ETF (LIT) with a 78% advance and then a 25% decline back to the low 70s. The ETF remains in a downtrend since December, but is on my radar because the decline formed a falling channel and LIT retraced 50-67% of the prior advance. The red shading around 80 marks resistance and a breakout here is needed to reverse the immediate downtrend.

The Strategic Metals ETF (REMX) has a healthy dose of lithium and international exposure (39% Australia, 31% China, 12.4% USA). The chart shows REMX with an 88% advance to the December high and then a 22% decline to the late January low. A falling channel formed as the ETF retraced 50% of the prior advance and we started seeing relative strength as a higher low formed from January to February. REMX is on the verge of a breakout and this would signal a continuation higher.

Oil Hits Another New High as Small-cap Energy Breaks Out

Oil remains in a strong uptrend and is trading near $100 early Tuesday. There is no setup on the chart, just a strong uptrend and new high. Even though oil seems overextended, the path of least resistance is up and higher prices are expected as long as the trend is up. Note that the State of the Union speech is tonight and inflation will be one of the big topics (gas prices, strategic reserves, drill baby drill). Expect volatility to continue.

As its name suggests, the Small-cap Energy ETF (PSCE) is focused on small-caps within the energy space. XLE, in contrast, is dominated by two major integrated energy stocks (XOM  23% and CVX 20.7%). As with many of these charts, the Trend Composite whipsawed in summer/fall, but price is in an uptrend with new highs in March, June and November. There are also three wedges and three wedge breakouts. A triangle formed most recently and PSCE broke out with a  big move on Monday. The breakout in small-cap energy suggests that money is moving into domestically oriented energy stocks. The Oil & Gas Equipment & Services ETF (XES) was covered on Thursday.

Uranium ETF Surges out of Falling Channel

The Uranium ETF (URA) was also highlighted on Thursday and the ETF broke out with a big move the last three days. The Trend Composite is still negative because this is a volatile ETF with deep pullbacks (-27% and -38%). Each pullback started from a new high and held above the prior low. Most recently, URA formed a higher low from January to February and showed some relative strength. This turned into strong buying pressure the last three days with a breakout.

Steel ETF Reverses Downtrend

Money is also moving into steel and metals related stocks. The Metals & Mining SPDR (XME) broke out on February 11th and continued higher the last three days. The Steel ETF (SLX) joined in with a double bottom breakout and bullish signal from the Trend Composite. SLX surged to the January high, fell back with a small  flag and broke out the last two days. Note that the ETF is up 11% since Thursday’s open and volatility is high. This means traders must give signals room to work to avoid whipsaws. Wider stops also translate into higher risk.

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

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
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