Ranking and Grouping ETFs – High and Tight Flags – Utes, REITs and Gold Become Oversold

The bull market continues to broaden as more money moves into offensive ETFs than defensive ETFs. The S&P 500 Momentum ETF (MTUM) is outperforming the S&P 500 Minimum Volatility ETF (USMV) over the last five weeks. The S&P 500 SPDR (SPY) and Nasdaq 100 ETF (QQQ) new highs while the Gold SPDR (GLD) and 20+ Yr Treasury Bond ETF (TLT) fell further.

The bull market continues to broaden as more money moves into the offensive ETFs than the defensive or alternative ETFs. The S&P 500 Momentum ETF (MTUM), for example, is up around 5% over the last six weeks and the S&P 500 Minimum Volatility ETF (USMV) is up less than 2%. The Consumer Staples sector stalled the last two months, while the Utilities SPDR (XLU) and Real Estate SPDR (XLRE) broke short-term support. The latter two are getting mean-reversion bounces as RSI(10) moved back above 30 this week. In addition, RSI(10) for the Gold SPDR (GLD) touched 30.

I am particularly impressed with some of the tech-related ETFs as they broke out over the last two weeks to end extended corrections and signal a resumption of their uptrends (IGV, IPAY, SKYY). The Internet ETF (FDN) did not partake in this breakout though and did not get an upgrade in the ranking. Breakouts in these tech-related ETFs reflect broadening strength within the Technology sector and this is also bullish for the broader market.

After a big run in October and a broadening of the bull market, many ETFs took a breather over the last one to two weeks. This means several formed short-term flags and these are bullish continuation patterns. In particular, I am watching these patterns in the S&P MidCap 400 SPDR (MDY), S&P SmallCap 600 SPDR (IJR) and Russell 2000 ETF (IWM). A pullback after an advance is normal so we should monitor these closely. Watch for flag breakouts to signal a continuation of the October surge.

Forget the Symbols and Study the Charts!

In case you missed it, Gregory Zuckerman just came out with a book about RenTech, the firm run by the legendary Jim Simons. I have not read it yet, but did come across an article with lots of nice tidbits. In particular, the quote below caught my attention:

The Renaissance team views the narratives that most investors latch onto to explain price moves as quaint, even dangerous, because they breed misplaced confidence that an investment can be adequately understood and its futures divined. A Renaissance employee once said if it was up to him, stocks would have numbers attached to them, not names, so investors would be less likely to succumb to a story.

Narratives are nice and help us understand, but they can bias our analysis and cause us to see things that aren’t really on the chart. Now let’s look at the ETF ranking and grouping with an unbiased eye!

1) Established Uptrend, Breakout, New High

  • SPY, QQQ, XLK, XLV, XLB

ETFs in group 1 are in established uptrends with recent breakouts and new highs. These are the leaders right now.

The S&P 500 SPDR (SPY) and Nasdaq 100 ETF (QQQ) remain in the top group as both recorded new highs this week. These large-cap dominated ETFs broke out of consolidation patterns in October and continued higher after the breakouts. They are getting a bit extended after 7.5% (SPY) and 9.5% (QQQ) moves the last six weeks. However, as we have seen time and time again, overbought and overextended are not always bearish indications. While such conditions increase the chances for a pullback or consolidation, ETFs can become overbought and remain overbought in strong uptrends. Anything with a relatively fresh breakout and 52-week high is clearly in a strong uptrend.

Elsewhere, note that the Technology SPDR (XLK) and Materials SPDR (XLB) hit new highs this week, while the Healthcare SPDR (XLV) hit a new high for 2019.

2) Established Uptrend, Consolidation Breakout

  • KIE, ITA, IHI, VIG, UUP

ETFs in group 2 are in established uptrends with recent breakouts, but they are just short of a new high. Hence, they are not quite as strong as ETFs in the first group. These ETFs hit new highs in September, corrected or consolidated into October and broke out of these consolidations recently. A consolidation or correction within an uptrend is a bullish continuation pattern.

The chart below shows the Insurance ETF (KIE), Aerospace & Defense ETF (ITA) and Medical Devices ETF (IHI) with new highs in September, relatively mild corrections into October and breakouts. IHI broke out in mid October, ITA broke out in late October and KIE broke out in early November. These three are very close to new highs and clearly leaders right now.

3) Established Uptrend, Short Consolidation 

  • RSP, XLF, XLI, SOXX, ITB, XHB

ETFs in group 3 are in established uptrends, but stalled over the last five days or so. The first chart shows the S&P 500 EW ETF (RSP), Finance SPDR (XLF) and Industrials SPDR (XLI) with established uptrends, an October surge  and a stall the last five or so days. The new highs in early November, are clearly bullish, but these ETFs are up sharply the last six weeks.

The short consolidations could be high and tight flags, and subsequent breakouts would signal a trend continuation. Personally, I am not a big fan of high and tight flags because they are very short-term patterns and the chances of whipsaw are high. Instead, I would prefer to wait for a throwback to the breakout zones or a 38-50% retracement of the October surge. The throwback zones are noted for XLF and XLI on the chart above.

The next chart shows the Semiconductor ETF (SOXX) breaking out of a bull flag in mid October and an Ascending Triangle pattern in late October. This is the strongest group within the Technology sector right now. Short-term, SOXX formed a tight consolidation to digest the surge from 210 to 235. The bulls are not backing down and a breakout would signal a continuation higher. The alternative is to wait for a throwback/pullback to the breakout zone in the 220 area. A throwback is just a pullback to the breakout zone that provides a second chance to partake in the breakout. The Home Construction ETF (ITB) also has a bull flag working and this is a short-term bullish continuation pattern.

4) Resuming Uptrend, Breakout, Higher High

  • SKYY, HACK, IPAY, IGV, FINX

The next group of ETFs are in the process of resuming their uptrends with breakouts over the last two weeks. The Cyber Security ETF (HACK) was the first to move with a big breakout in October. The Cloud Computing ETF (SKYY), Mobile Payments ETF (IPAY) and Software ETF (IGV) moved next with resistance breaks. The FinTech ETF (FINX) has yet to break out, but is challenging resistance and very close to a breakout (so I opted to put it in this group). Note that all five are back above their rising 200-day SMAs.

What’s the methodology behind the madness here? These ETFs moved sharply higher in the first half of the year and then corrected in the third quarter. The corrections became extended (3+ months), but the two steps forward and one step backward structure remained. IGV, for example, advanced from 160 to 230 (+44%) and then fell back to the 205 area (-11%). This decline formed a falling wedge, retraced 38% of the prior move and returned to the rising 200-day SMA. The pattern, retracement amount and test of the 200-day are all normal for corrections within bigger uptrends.

There were concerns in September because IGV was underperforming the broader market and many other ETFs. IGV started to alleviate concerns by establishing support with two lows in the 205 area in October. It then broke out in early November. This breakout signaled an end to the corrective period and a resumption of the bigger uptrend. The second window shows FINX with a similar price structure, but the ETF is just short of a breakout.

5) Uptrend, Extended Consolidation, Short Upswing

  • MTUM, XLY, XLC, HYG

ETFs in group 5 are in uptrends overall and close to new highs, but still stuck in sideways consolidations. The chart below shows the S&P 500 Momentum ETF (MTUM), the Consumer Discretionary SPDR (XLY) and the Communication Services SPDR (XLC). MTUM is outperforming the S&P 500 Minimum Volatility ETF (USMV) over the last six weeks (+5.14% vs +1.77%). This is positive for the broader market and MTUM. The long-term trend is up, the consolidation is a bullish continuation pattern and the swing within this pattern is up (3 for 3). Trends in motion stay in motion so I expect a move to new highs. Watch 118 for a short-term breakdown within this consolidation.

The Communication Services SPDR (XLC) is even closer to its prior highs and stronger. The Consumer Discretionary SPDR (XLY) is the weakest of the three because it stalled the last four weeks. Even so, an Ascending Triangle is possible and the mid October breakout zone is holding. The bigger trend is up and the stock market environment is bullish. I, therefore, expect a bullish resolution and breakout to new highs. Watch AMZN because it is the biggest holding (22%).  

6) Emerging Uptrend, Breakout, Short Consolidation 

  • MDY, IJR, IWM, BOTZ, XRT, KBE, KRE, REM, EFA, IEMG

ETFs in the next group are classified with “emerging” uptrends because their breakouts and/or uptrends are relatively recent (less established). These ETFs are leading the market over the last two to three months because they formed higher lows from August to October and higher highs over the last few weeks.

The first chart shows the Bank SPDR (KBE), Europe, Australasia and Far East ETF (EFA) and Core Emerging Markets ETF (IEMG) with higher lows in early October and breakouts with sharp advances. KBE and EFA stalled the last eight days, while IEMG pulled back (perhaps because of Dollar strength). IEMG is near its breakout zone, which turns first support to watch on this throwback. The green zones on the KBE and EFA charts also mark potential support should we see a pullback.

The next three price charts are not as strong as the first three, but we are seeing higher highs here in November. The S&P MidCap 400 SPDR (MDY) hit a 52-week high, while the S&P SmallCap 600 SPDR (IJR) and Russell 2000 ETF (IWM) exceeded their July-September highs. These higher highs are the first steps towards an emerging uptrend. All three edged lower the last seven days and could be forming falling flags, which are short-term bullish continuation patterns. Watch for flag breakouts to signal a resumption of the October advance. Note that I do not view these pullbacks as failed breakouts because a pullback after a big advance is normal.  

7) Emerging Uptrend, Lower Low (Oct), Higher High

  • IBB, XBI, IHF

The next three ETFs are in emerging uptrends and these uptrends pretty much came out of nowhere. The Biotech ETF (IBB), Biotech SPDR (XBI) and Healthcare Providers ETF (IHF) formed lower lows in October and showed no signs of relative strength from August to October. All three then surged with IHF breaking out first, IBB breaking out in late October and XBI finally exceeding its September high this week. The bigger trends are now up, but these three are quite extended. The green zone marks the first area to watch should we see a pullback in IBB.  

8) Uptrend, Correcting, Lagging

USMV, XLP, XLU, XLRE, IYR, PFF

The next group of ETFs were leading in September, but turned into laggards as the bull market broadened over the last six weeks. Technically, they are still in uptrends overall and remain well above their rising 200-day SMAs. However, they are likely to continue underperforming as long as the bull market broadens.

The chart below shows the Consumer Staples SPDR (XLP) holding up much better than the Utilities SPDR (XLU) and REIT ETF (IYR) over the last four weeks. XLP formed a very flat triangle and held above the October lows. XLP even popped on Wednesday and could be poised to break out.

In contrast to XLP, XLU broke below its October low and RSI(10) moved below 30 to become oversold for the first time this year. IYR broke its September low and RSI(10) also dipped below 30 for the first time this year. RSI has since moved back above 30 to signal a mean-reversion bounce in both. I am not particularly interested in this signal because the bull market is broadening and defensive sectors are out of favor.

9) Extended Correction, Lagging since Sept

  • FDN, GDX, AGG, TLT, LQD, GLD, SLV

Now we get into ETFs with extended corrections and underperformance. The Internet ETF (FDN) is mixed in with precious metals and bond ETFs. What a motley crew. Personally, I am not interested in bonds or gold because the bull market in stocks is broadening and the Dollar is in an uptrend. In addition, stocks surged the last six weeks so why be interested in something that went down during this time period?

The first chart shows the Gold SPDR (GLD) surging 23% and hitting a new high in early September. The ETF then fell the last ten weeks and the overall pattern still looks corrective in nature (falling flag, channel or wedge). In addition, the decline retraced around 38.2%, which is a modest retracement. Assuming this is a correction within a bigger uptrend, a short-term oversold condition would be quite interesting. Well, note that RSI(10) touched 30 this week. This is a mild oversold condition and the first since April. Thus, bottom pickers and mean-reversion traders should be active. Trend and breakout traders would wait for a break above the early November high.

The next chart shows the 20+ Yr Treasury Bond ETF (TLT) peaking in September and retracing around 50% of its prior advance with the decline to 134. As with GLD and GDX, this could be a big correction within a bigger uptrend. However, TLT is seriously lagging other ETFs so there are better choices out there.

10) Downtrend, Lagging

  • TAN, XME, XLE, MJ, FCG, XES, XOP, AMLP, REMX

I am not even going to cover the nine ETFs in downtrends because the other 51 look better.

That's it for today. Thanks for tuning in!

-Arthur Hill, CMT
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