Strength is broadening among the industry group and sector ETFs. In particular, several ETFs that were classified as trending lower and lagging have been upgraded to emerging leaders. I do not mean “Emerging” markets, but the Core Emerging Markets ETF (IEMG) is part of this group, as is the Europe Australasia and Far East ETF (EFA). These ETFs represent performance outside the US.
SPY, QQQ and five of the big six sectors have been in uptrends and holding strong for some time. However, this was clouded by relative weakness and downtrends in key groups, such as retail and banking. This started changing in September and continued over the last three week as ETFs related to retail and banking perked up. These changes, moreover, could bode well for the Russell 2000 ETF and S&P MidCap 400 SPDR, which remain rangebound at best.
The PDF below contains annotated charts for the 60 Core ETFs. The first two pages show the list sorted by the ranking and grouping. The second two pages show the list sorted in a top-down manner (broad market, sector, industry group…). The charts then follow and they were updated on Saturday (26-Oct).
Ranking and Grouping Summary
Group 1: Uptrends, Leading and New Highs
- XLRE, IYR, ITB, XHB, PFF
Group 2: Uptrends with Short-term Bullish Patterns
- USMV, XLP, XLU, SOXX, ITA, VIG
Group 3: Uptrends, Consolidating and Near Highs (within 3%)
- SPY, RSP, QQQ, XLK, XLY, XLF XLI, XLC, KIE, HYG
Group 4: Emerging Leaders (held above Aug low or exceeded Sep high)
- XLV, BOTZ, KBE, KRE, REM, IHF, IEMG, EFA
Group 5: Uptrends, Consolidating and Near Support
- MTUM, XLB, TAN, IHI
Group 6: Uptrends, but in Correction Mode
- AGG, TLT, LQD, GDX, GLD, SLV, UUP
Group 7: Extended Trading Ranges or Slight Downtrends
- MDY, IJR, IWM
Group 8: Downtrends that Could Amount to Corrections
- SKYY, HACK, FINX, FDN, IPAY, IGV
Group 9: Downtrends and Lagging
- XLE, MJ, IBB, XBI, FCG, XES, XOP, AMLP, XME, REMX
Group 1: Uptrends, Leading and New Highs
XLRE, IYR, ITB, XHB, PFF
The REIT, Housing and Preferred EFTs are the undisputed leaders because they hit new highs this week. The Real Estate SPDR (XLRE) and REIT ETF (IYR) consolidated into mid October and broke out of bullish continuation patterns with a surge the last five days. Both hit new highs to extend their existing uptrends. Yes, the strong just keep getting stronger.
The Home Construction ETF (ITB) has barely stopped for a rest since the Ascending Triangle breakout in mid August. The ETF is up over 10% with a steady march higher the last two months. Notice how ITB became “overbought” when RSI moved above 70 in early September. The trend was already up and this overbought reading showed strong upside momentum. Also notice how RSI has not reached 30 all year and did not become oversold. This is testament to the shallowness of the pullbacks.
Group 2: Uptrends with Short-term Bullish Patterns
USMV, XLP, XLU, SOXX, ITA, VIG
These ETFs are in uptrends with short-term bullish continuation patterns taking shape, such as falling flags, falling wedges or small triangles. Namely, we can see the S&P 500 Minimum Volatility ETF (USMV), Consumer Staples SPDR (XLP), Utilities SPDR (XLU) and Semiconductor ETF (SOXX) with falling flag breakouts of some sort. A falling flag represents a short rest within the uptrend and the breakout signals a continuation higher. Even though SOXX fell back after its breakout and has yet to clear the July-September highs, the big trend is up and I would expect a move above these highs because of this uptrend.
Group 3: Uptrends, Consolidating and Near Highs
SPY, RSP, QQQ, XLK, XLY, XLF XLI, XLC, KIE, HYG
These ETFs are very close to new highs and several are forming bullish Ascending Triangles, which are bullish continuation patterns. What is the method behind the madness of these patterns? The equal highs represent a zone of overhead supply or resistance. On the other side, the higher lows reflect shorter pullbacks as demand reasserts itself at higher prices. As Ascending Triangle is typically a bullish continuation pattern because it forms within an uptrend as a consolidation. A break above the equal highs confirms the pattern because demand has overcome overhead supply. This signals a continuation higher.
Note that the S&P 500 SPDR (SPY), S&P 500 EW ETF (RSP) and High-Yield Bond ETF (HYG) have Ascending Triangle patterns working. It is also possible that an Ascending Triangle is forming in SOXX over the last three months. HYG represents junk bonds and the riskiest credits in the fixed income market. Junk bonds are the canaries in the credit markets and a bullish continuation pattern is positive for the markets in general.
The Nasdaq 100 ETF (QQQ), Technology SPDR (XLK) and Consumer Discretionary SPDR (XLY) hit new highs in July and then formed triangle patterns. This is because of the slightly lower high from July to September. Nevertheless, all three formed higher lows from August to October and are within 3% of new highs. You do not even need a chart to understand that something is in an uptrend if it is less than 3% from a new high. Again, the bigger trend is up and these are bullish continuation patterns. In general, trend continuations are more likely than trend reversals so I would expect new highs in the coming days or weeks.
Note that I put out a commentary yesterday showing the zigzag uptrends in the Industrials SPDR (XLI) and Finance SPDR (XLF). The Comm Services SPDR (XLC) is also consolidating since mid July and within 3% of a new high.
Group 4: Emerging Leaders
XLV, BOTZ, KBE, KRE, REM, IHF, IEMG, EFA
These ETFs were introduced last week as emerging leaders because they held well above a benchmark low (the August low). Many broke out of short-term bullish continuation patterns and some even exceeded their September highs, which are benchmark highs. The S&P 500 EW ETF, which we can use to set benchmark lows and highs, held just above its August low and has yet to exceed its September high. ETFs that held WELL above their August lows and exceeded their September highs are showing emerging leadership.
The Healthcare SPDR (XLV) is in this group even though it did not hold above the August low. I put it here because there are higher lows from April to October and higher highs from February to July (big rising channel). The ETF fell from July to September with a small falling channel and then exceeded its September high this week. The uptrend and newfound relative strength bode well for this sector, which is still the second largest in the S&P 500 (13.8%).
The Robotics & Artificial Intelligence ETF (BOTZ) is one of the strongest in this group because it reversed near the 61.8% retracement in August, held well above the August low in October and broke out of a small wedge last week. The decline from April to September also looks like a big corrective pattern and BOTZ is breaking out of this decline as well.
It is also encouraging to see the Retail SPDR (XRT) and Regional Bank ETF (KRE) in this group. Retail is a key part of the Consumer Discretionary sector, while regional banks are a key part of the Russell 2000 ETF (IWM) because the finance sector accounts for 18.25%, and is the biggest sector. XRT exceeded its July high with a big surge in September, held well above the August low on the subsequent pullback and continued higher with another strong surge the last two weeks.
The Regional Bank ETF (KRE) is not quite as strong because it remains with lower highs since February and has yet to break resistance. However, KRE held well above the August low and is challenging its September high with a strong move over the last two weeks.
Group 5: Uptrends, Consolidating and Near Support
MTUM, XLB, TAN, IHI
These ETFs are still in uptrends and consolidating, but they are closer to consolidation support than resistance. This means the bounces in October were not as strong as those seen in other ETFs, such as those in the first four groups. These ETFs are at a moment of truth.
The S&P 500 Momentum ETF (MTUM) and Solar Energy ETF (TAN) tested their August lows in early October and consolidated near these lows the last three weeks. Both are above their rising 200-day SMAs and support is holding, which is bullish. I am watching short-term resistance from the October highs. Short-term breakouts would suggest a successful support test and indicate that the bigger uptrend is resuming.
Group 6: Uptrends, but in Correction Mode
AGG, TLT, LQD, GDX, GLD, SLV, UUP
These ETFs are in uptrends, but they are in the midst of some sort of correction. The Gold Miners ETF (GDX) and Gold SPDR (GLD) have clear corrective patterns, while the 20+ Yr Treasury Bond ETF (TLT) and Aggregate Bond ETF (AGG) have more opaque patterns. Corrective mode is the common thread. The first chart shows GDX with a falling wedge and the second shows GLD with a falling flag. Both are typical for corrections within a bigger uptrend, but we have yet to see breakouts. I would like to see BOTH breakout before taking a move seriously.
TLT hit a new high in early September and is currently in the midst of a correction that could extend to the 132-134 area. TLT got a nice oversold bounce in mid September, but this upswing reversed with a sharp decline in early October. Perhaps it has something to do with the upswing in SPY over the last three weeks. In any case, TLT and the bond ETFs are in corrective mode that could last a few more weeks.
Group 7: Trading Ranges or Slight Downtrends
MDY, IJR, IWM
Now we get into the weaker side of the market. ETFs in groups 7, 8 and 9 are in extended downtrends and showing relative weakness. It all starts with the S&P MidCap 400 SPDR (MDY), S&P SmallCap 600 SPDR (IJR) and Russell 2000 ETF (IWM). Yep, it is like a broken record because these three have gone nowhere since March. There are, however, two short-term positives at work. IJR and MDY formed higher lows from August to October and all three broke above short-term resistance with a bounce the last three weeks. Despite these positives, the big red resistance zones remain the dominant chart features and breakout here are needed to get out of these ranges.
Group 8: Downtrends that Could Amount to Corrections
SKYY, HACK, FINX, FDN, IPAY, IGV
This group represents the tech-related ETFs that are trending lower and lagging since August. Even though these downtrends are not that old (~3 months) and could still be corrections, these groups are clearly out of favor right now so be careful.
The chart below shows the Semiconductor ETF (SOXX) in the top window with three benchmark levels: the early June low (blue), the July high (red) and the August low (green). SOXX is leading and in an uptrend. The other five did not make it back to their July highs in September and then exceeded their August lows in early October (lower highs and lower lows). FDN and HACK even exceeded their early June lows. The thick red lines mark resistance levels based on the September highs. I would like to see breakouts here before considering these ETFs as potentially bullish.
Group 9: Downtrends and Lagging
XLE, MJ, IBB, XBI, FCG, XES, XOP, AMLP, XME, REMX
ETFs in group 9 are in clear downtrends and clearly lagging. Remember, we have a choice when it comes to picking stocks and ETFs. I prefer to focus on names that are in uptrends and showing relative strength. This is the name of the game when it comes to the stock market. Even though it is tempting to pick bottoms, this is often a losing proposition over the long term. The Energy SPDR (XLE) held its August low and bounced here in October. This is perhaps a Double Bottom, but it is far from confirmed. More importantly, the overall trend is clearly down and this ETF is one of the bigger laggards. Why mess with it? Technically, a break above the intermittent high is needed to confirm the Double Bottom. Notice that XLE is still closer to the August low than the September high. Pass.
Bottom Line
The defensive ETFs related to REITs, Staples and Utilities remain in the top groups and continue to lead. This is NOT negative because we are also seeing leadership from Housing and Semiconductors. In addition, we have Ascending Triangles working in some other key ETFs, namely the S&P 500 SPDR and the High-Yield Bond ETF.
We started seeing a shift in September-October when several tech-related ETFs broke their August lows and several laggards started to outperform by holding well above their August lows. The tech-related ETFs remain in the dog house, while the emerging leaders in group 4 are on my radar. It is very positive to see ETFs related to Retail, Banking and Emerging Markets catch a bid.