Power Sector Review

February 12, 2024

The Big Picture

The big three we follow in the triple play chart all put in strong weeks. Above, we show the daily version showing the $SPY and $QQQ are on fairly relentless trends. We all knew that coming in; however, this week was hinging much more on how the $IWM performed, a break and hold below the MA bands would have likely also reversed the RSI and put it testing the 40 level again. Instead, the little guys came through and moved right back up within $.25 of the high close from the year, which was a gap down on January 2, 2024. We will see early week if that is a tough level to get through or not. It is coming in with some momentum from a strong week and closing back over the December breakout level after a deep back-test that looked to be failing on the first dip, but buyers kept mulling around and now are starting to get more aggressive. It is OpEx week, so that will add to volatility, but usually in the larger names that have more exposure to options. That doesn’t mean they are impervious as there are a ton of options on indexes, ETFs that could push and pull them around a bit. $SPY and $QQQ aren’t slowing down yet, but with this kind of strength in those and market confidence building, it looks like small caps have a chance to take the lead for a minute while they catch up and the others rest. Get more detail on this in the Macro Review for the week.

From a sector level there was very little change this week. Financials continue to move down the ladder based on its own weakness as opposed to excessive strength from other areas. The leaders, Health Care, Information Technology, Industrials and Consumer Discretionary all showed out this week and continued to separate themselves from the pack. With the exception of Health Care (which I would debate its standing), all of the leaders are offensive, cyclical type sectors which bodes well for more strength to come as well as confirming the economy is holding up as well or maybe even better than the numbers are suggesting.

 

Snapshot Review

Remember, the reason I call these snapshots is because they are just one day’s datapoints and with many being short term readings. They can change quickly, so these spreadsheets can be very volatile from day to day and we are just looking at Friday’s data and how they closed out the week.

First, we always look at is the short term breadth because it gives us a mix of shorter measures telling us how each sector and subsector are acting over the near term. Buyers are still chomping down on the strong sectors and ignoring those that have more defensive stances. Precious Metals stands out in that respect, but is starting to get closer to washout levels for a short term bounce. Don’t know that it will be worth participating, but you really can’t know, just have good risk management if you decide to try. It looks like we are in a strong environment that is about to hit some weaker seasonality next week. This could cause some back filling or just sideways action. Be ready for either and realize the ones that are moving sideways instead of giving up their gains (like Biotechnology and Construction Materials and many others did last month), are most likely to lead when the next leg comes.  We are still in the camp that the 4th quarter surge was initiation and not climax, so we are making our lists and looking for entries during this period. 

Probably no where better to get a quick short, intermediate and long term view of the markets directed than in the Moving Average Breadth Snapshot. Having these three measures together has been a staple of our breadth work for more than two decades now. 

To follow strength, we watch how these react to any pullback. If they stay green, that is exceptional, but not necessary in a digestion stage. Being able to compare them amongst the group is a great asset. I mentioned above Construction Materials which broke out last week on our equal weight index had moved sideways for a while and is now emerging (profiled in more detail below). Looking at this, it still favors Consumer Discretionary and Industrials, both of which we profiled in last week’s Power Sector Review if you want to go back and review it. The other note I would make here for you pullback buyers is that Financials are barbelled here which can lead to a short term reversion trade. Again, will it last more than a minute? We don’t know until we get into it. Our job here is to identify opportunities for you to build a trade plan around with will include things like duration, time frame and most importantly when you bail on the idea. Defensive while being chronic underperformers here are treading water here and showing pulling themselves out of the red areas, but that is about it for now. 

I mean, seriously…. It is pretty darn clear who is moving and getting the participation and who is not. The new highs list is showing a lot of green as we finished the week. The Stocks making new lows were pretty non-existent, except for in Precious Metals which continue to get hit, but are moving closer to a short term washout as well based on other measures we use. Close, but no evidence we are there, so don’t go in head first. They are guilty until proven innocent as my friend Brian always says.

This shows us the buying and selling pressure each day. Since these are Friday’s numbers, you can see where the money was flowing. The most interesting part is two of the weaker sectors recently showed some strong buying on Friday. Financials and Utilities pulled strong numbers. Two notes here, with Utilities, this isn’t as rare as most other sectors and subsectors since there are so few components to measure making the percentage reading spike both ways more often. It is still significant though and should be assessed for a change in character. Financials I mentioned have sold off very hard after the Fed and another regional scare, but are at potential short term oversold zones and then we get down here and see they showed the most buying pressure across all the subsectors. Insurance would be the safer play here as was the clear leader going into this sector pullback and has held up the best of the three dark green shaded subsectors. However, Regionals and Thrifts & Mortgage Finance got whacked and have the most reflexivity if the fear is actually subsiding in the space now. 

Subsector Relative Strength

In this section, we will move back to the price and performance world and take a look down into where things are moving in sectors.

This week we didn’t see nearly as much movement on the sector or subsector levels as we have in recent weeks while the rotation was taking place under the hood. That doesn’t mean there wasn’t anything interesting once we get down to the subsector level. The first table shows which subsectors this week outperformed all the major ETFs we follow. We always need to keep in mind that these are EW subsectors we are pitting against capitalization weighted indexes, but that is exactly why we do it. It’s some great information when an equal weighted segment of the markets can beat all the big boys. It says something about the desire to get involved from investors. 

Semiconductors was the runaway winner this week, and since this is equal weighted, it wasn’t just $ARM and $NVDA, but they certainly helped the cause. We will see more below about this space. All on here are pretty usual suspects except the Consumer Discretionary subsectors making an appearance. Luckily, this doesn’t surprise us as we covered it last week.

Now from a pure 3mo relative strength perspective, many of the same names are up top. In a rotation market and especially if we are going to see small caps make a move, the rotation often happens inside sectors and subsectors. This means, while the leaders may be extended, this is a perfect time to look deep inside and see which are starting to gain relative strength versus that specific space. This is why the RS Movers tabs are there to find what is acting different right now. Then we go and find out why.
I highlighted Semiconductors on this list because it has moved handily up the RS ladder over the last quarter with a dip over the last month. There are 52 names of all shapes and sizes in the Semiconductor Subsector. I am sure there are some names setting up now and not yet too extended.

The second list is the RS movers this week, agreeing there just wasn’t that much rotation. That just tells me the ones that made a move might be worth a look since all the RS Gainers are highlighted on both the regular RS Movers (5 day RS lookback) and the Monthly RS Movers (21 day RS Lookback), it gives even more “weight of evidence” in their favor.

Zooming In

This week, since we aren’t seeing the movement on the sector level, I am going to move down to the subsector level and cover a couple of those in a little more depth, but still just skimming the surface of the site, so definitely go check out that specific page if you want to find your own angle.

Semiconductors

This is a sector that has everyone’s attention right now with the likes of $NVDA $AMD $ARM and a few others getting most of the attention. If you look at the $SMH as your proxy, it also looks a little extended right here, so why dig deeper? Well, if we are right about small caps emerging, then moving down the component list may be worth our while.  At a minimum, looking at it from an equal weight perspective, it looks wide and loose, but with underlying buying support showing up where it needed to. Now we see if the top holds or if things broaden out and breakout here.

The RS window on top shows a very bumpy ride, but it is moving up and to the right as we near a breakout in the EW chart. Bears had two different chances to knock this down so far this year and have failed as buyers showed up both times giving us the potential for a rectangle breakout from the last month or two and a much larger base break if we look to the left. RSI held the bull range on both dips and is now heading back over the 60 level with CFG sporting a higher low on that retest leg. Buyers keep showing up where they need to this year versus last summer and fall when they disappeared for a bit.

I put a Fibonacci retracement here to show you how well they line up with the 38.2% retracement level, which is considered a minor pullback. The comparatives are all making higher lows except against the EW Information Technology space. I bet that surprised a few of you. However, all of them have made a pivot higher over the last week that we watch for improvement.

During this current move off the lows, we haven’t seen the NHNL go negative even with the volatility. Moving averages turned back up and are moving. In fact, all the short term measures we follow are running with price last week. Lastly, we are nearing a buy signal on the Summation Index which would be good to see for another confirmation point. 

 

These measurements are also perking up quite well as you can see. However, I want to draw your attention to the 63day measures which give me another piece of confidence in this space. As I noted above, buyers disappeared, but the sellers aggressiveness is what was notable versus the recent dips. 

Semiconductors Leaders

In both of these subsectors, we are going to look at three different views. First, we look at the weekly outperformer, the holding that outperformed all the major ETFs we follow. This list is long as this sector killed it last week, but there are plenty here with RS readings still stuck in the middle. Those are often my favorites in lists like these and the RS Movers.

RS Leaders are stacked with the names I mentioned in the beginning of this section, but also some you might have forgotten about. These are worth a look, but have all already made large moves this quarter and again last week. This is why the chart is the key, until we look, we have no idea if it has a set up or not. I don’t go through them all here, but you can on the Semiconductor page.

Finally, we land on our RS Movers filter. It is one of my favorites, especially when so many names are NOT green right now. This tells me we have some up and comers on here and we can look outside the over followed recent leaders.

Retail

Retail is the other subsector I decided to dig a little deeper today. We will follow the same script as above and see where it takes us. This area saw some strong moves from names like $RL and $PVH recently; but as a whole, the space is putting in a nice reversal here.

If we start in the top window with our RS calculations, you can see this didn’t have any life until mid summer last year and has been bouncing around with an upward bias and, after some digestion, it looks ready to take on some leadership again. The digestion has been very orderly as it back-tested the breakout and broke the downtrend line decisively on Friday and is pressing on the short term horizontal zone now. CFG momentum alerted us with its much higher low on this last dip attempt.

Breadth is pretty good on all the longer term measures here with AdvDec Line leading  currently clearing the little consolidation within this base. The AdvDec Line still needs to clear the highs, but price isn’t there yet either. We did see a nice spike in the NHNL Differential the last few days. McClellan Oscillator is shooting above the flatline which forged a new McClellan Summation buy signal on Friday.

Versus all the equal weighted comparisons and the $IWM, this space has been on a steady uptrend, but against the Cap weighted majors it floundered until November and is now making higher lows and trying to break the sharp relative downtrends from January’s slump. 

I really like the higher lows during the pullback on the short and intermediate measure. However, it is the 63day that is giving us the most information right here. The lack of new 63day lows during the pullback shows things are holding up well under the surface on the longer term and now seeing new highs jump strongly across all three of the time frames.

Retail Leaders

First, we see another long list of names that outperformed all the majors for the week. Not quite as robust as the Semiconductors, but very respectable with plenty of names to explore in here.

The leaders in RS from Retail have some lesser known names mixed in with some favorites like $BOOT $ASO (which is breaking out as I write this).

The RS Movers filter here is pretty short and gives a very select few names to look at, but again none are dark green. Another note, even if it is an RS loser, it is worth looking at the previous RS reading to see if maybe it is something that was strong and just in a relative pullback mode like $TSCO, a leader setting back up after a strong pullback or like $BIG legitimately getting crushed. This is just our alert to look, the chart is always the final arbiter.

That gives some things to dig into. I highlighted a couple of places here at the bottom, but the broader lists above had plenty of other juicy subsectors to explore. The site will give you all you need to drill down to the individual or ETF opportunities you are looking for in any market environment. I know we can pullback and have mentioned the seasonality, but right now I think we are in a place where rotation under the surface will keep things moving, even if the cap weighted indexes follow the seasonality to a T. Remember, make a list and realize that if we are thinking mid to late March for the seasonality to strengthen back up, leaders will start weeks earlier, so don’t sleep on this rotation.

This information is for educational purposes only and is not a recommendation.  Please see the full disclosure in the footer.

As always, I hope this helps!