Signs of Rotation Again, Corrections Targets for XLK/XLC, StochClose Signals vs Price Action for Some High-Beta ETFs (Premium)

Signs of a market rotation began to appear last week as the 10-yr Treasury Yield surged, the 20+ Yr Treasury Bond ETF plunged and the Regional Bank ETF advanced over 3%. Techs and high-flyers held up relatively well last week, but got pummeled on Tuesday with many falling more than 3%. See this commentary for more on KRE and the 10-yr yield.

The breakout in the 10-yr Treasury Yield signals a continuation of the bigger uptrend and targets a move towards the 2% area. Note that this yield was around 2% in the summer of 2019, just over two years ago (pre covid). The chart below shows the 20+ Yr Treasury Bond ETF (TLT) in the middle window and the 10-yr Treasury Yield in the lower window.

While a move to 2% should not be earth shattering, it does signal a change and the markets are violently digesting this new information. The bond market leads the Fed and the bond market is pricing in tighter Fed policy. Further strength in the 10-yr Treasury Yield could weigh on tech and high beta names, and perhaps the broader market.

Amibroker is my main charting platform and Norgate is my data provider. Norgate has some excellent breadth data going back over 20 years. This data covers the S&P 500, S&P MidCap 400, S&P SmallCap 600, Nasdaq 100, Russell 2000, Russell 1000 and Russell 3000. Amibroker is great for building and testing strategies, but their charts are not the prettiest. Can’t have it all!  

XLK and XLC Dominate SPY

Keep in mind that the Technology SPDR (XLK) is 28% of the S&P 500 and the Communication Services SPDR (XLC) accounts for 11%. Together, these two tech heavy sectors account for nearly 39%. The big trends for XLK and XLC are still up, but they are ripe for corrections and rising rates may be the excuse needed. The charts below show what a 33% retracement of the October-September advance would entail for XLK and XLC.

High-Beta Tantrum

Returning to the first chart, notice how the 10-yr Treasury Yield surged from late January to mid March (yellow shading). The yield moved from the 1% area to the 1.7% area in less than two months. XLK and XLC withstood this surge, but a number of tech and high-beta ETFs were pummeled in February-March. This list includes Clean Energy (ICLN, QCLN, PBW, FAN, TAN), the ARK ETFs (ARKF, ARKG, ARKQ, ARKK, ARKW, PRNT) and the eSports/Gaming ETFs (ESPO, GAMR, HERO). Note that the Sports Betting iGaming ETF (BETZ) held up well in February-March.

These ETFs triggered bearish StochClose signals in spring. Some of these ETFs triggered bullish StochClose signals in late August or September (QCLN, TAN, ARKF, ARKW, ARKQ, ARKK, BETZ). Some of these signals whipsawed back to bearish (FAN, ARKG, ESPO). Some ETFs did not trigger bullish signals at all (ICLN, PBW, IZRL, HERO, GAMR). These last five are by far the weakest.

I studied the charts for these high-beta ETFs and came to the conclusion that the price action is more bearish than bullish. StochClose is based on price action over the last 125 days and many ETFs were able to move into the upper half of their six month ranges to trigger bullish StochClose signals. Ignoring StochClose and focusing on the price chart, these charts show weak buying pressure the last few months and slightly stronger selling pressure, especially in September. At the very least, these ETFs are clearly lagging because they peaked two to six months ago, they are below their 200-day SMAs and their 50-day SMAs are below their 200-day SMAs. These SMAs are not shown on the price charts.

Systematic signals and discretionary analysis do not always agree.  Sometimes the systematic trend signals are backed up by breakouts and bullish price action on the charts. Sometimes the charts show promise when the signal triggers and price action catches up the signal. Many of the charts showed promise in early September. Some of these StochClose signals are still bullish, but these ETFs look vulnerable to whipsaws based on my chart assessment.

The first chart shows the Clean Edge Green Energy ETF (QCLN) with the thick red line marking the March high. QCLN never challenged its March high. After a low in May, the ETF bounced with a rising wedge (dotted lines) and broke the wedge line in early July. There was not an immediate continuation lower as the ETF formed a triangle into September. Again, we are seeing lower highs from late June to mid August to early September (weak buying pressure). QCLN looks poised to break the August lows and this show an uptick in selling pressure.

The ARK Fintech Innovation ETF (ARKF) broke out of a falling wedge in mid June and StochClose turned bullish in late August. Even though the early September high exceeded the late June high, it did not exceed the March high. Moreover, a rising wedge formed and the ETF broke down. Notice that the rising wedge retraced 50-67% of the prior advance. Both the retracement amount and pattern are typical for counter-trend advances. Even though StochClose is still bullish, the price chart looks bearish.

The ARK Autonomous Tech Robotics ETF (ARKQ) fell sharply from mid February to mid March and then consolidated with a long trading range. This range narrowed over the last few months and now looks like a triangle since the May low. A consolidation after a sharp decline is viewed as a bearish continuation pattern and a break down would argue for lower prices.

The next charts show a few more ETFs with bullish StochClose signals and bearish price charts.

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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