Power Sector Review

February 19, 2024

The Big Picture

The majors finally got challenged this week as we see above in the daily triple play chart. $IWM came out on top while $QQQ took the brunt of the week much of which was due to a very weak bounce off the Tuesday CPI hit. $IWM took the biggest daily hit and also saw the strongest rebound only to get hit again as the week went on. All of that and $IWM was the only one to pull out a gain for the week, but it was a wild ride. During this we saw some rotations start, mainly large to small and remaining growth biased. For more Macro views, you can check out the Weekly Macro Review.

In the equal weight sectors we see the Offense is still on the field with Health Care continuing to show strong weekly gains. The other three were not as robust, but hung in there relatively. Energy was the actual top gainer for the week and Materials was next behind Health Care. Commodity names haven’t seen much attention lately, so strong weeks here are welcome as we come into some seasonality. Energy was the big RS mover for the last week and month, so we will take a little closer look at this one later in the post. Real Estate also gave up more ground as sentiment turned more negative on rate cuts which would help the space a good bit. 

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.

Short term breadth didn’t light much up on Friday after a volatile week, swinging from green to red and back to green, so a fairly benign end of the week is fine. Energy ending with the most green, but still has some work to do overall.

The Moving Average Breadth snapshot is also not showing much for extremes. Banks are showing a large percentage over the 200sma, well really all smas. It is amazing to me how closely each of the names in the Financials Subsectors track each other and concentrate together when reading their measures here, even on the sector level. Construction Materials also continues to be hot inside a relatively strong Industrials sector. The worst continues to be Precious Metals which can’t seem to get off the mat, but this is an overall improvement from earlier in the week. 

Even with some of the headline red on the day Friday, the New Highs had the most action with Energy again being a big standout, Materials in there again. Some other defensive subsectors perked up too, including Food & Staples Retailing from Consumer Staples, hiding inside a lagging and very defensive sector on balance. To be fair, this subsector includes all the big box retail stores which are doing pretty well. We will take a closer look at the Food & Staples Retailing subsector further down in this report. Nothing really on the New Lows radar to end the week.

Buying and Selling Pressure, again very short term indicators, gave a little different picture than the New Daily Highs view and showing under the surface there was some larger selling, even in some of the hot spots in the market. Interesting that the one green spot to end the week is Industrial Metals, which may be worth a closer look with the rest of Materials (maybe not Precious Metals).

Subsector Relative Strength

This week it was a large selection of subsectors that outperformed the majors. Energy with two subsectors on top of the 29 total that outperformed on the week. It was wide mix which goes along well with the broadening out of the participation in these markets. Even further driven home by only having one Information technology sub on the list.

 

Leaders didn’t move around much this week in the end. Biotech stays on top and a couple of financials sneaking back on the list. There is nothing that says these sectors can’t keep leading. The two Energy Subsectors and Industrial Metals should have already caught your eye above, but the RS gainers spells it out. The RS Losers section even has a few leaders on it, taking a break for now. 

Zooming In

Energy Sector

Energy is the big sector mover for the week, and for many including us, it is about time. Energy has lagged hard in this rally after showing solid strength in the fall. The sector pretty much petered out when the rest of the markets began to run. This sector is less than 5% of the S&P 500 weighting, so it gets very little attention. That also means if you can overweight with individual names or ETFs when it does move it can provide a nice separation from the averages. Below we go over each major chart we follow in the sector.

Relative strength in the sector has been rough since the markets started moving in November and this sector completely stalled. However, we can see by the chart that all it really has done is form a big sideways pattern since, not really pulling back a lot. RSI did go into a bear range, but the last two tests of 40 held giving some clues to underlying improvement. If we get the break of the wedge, we are also likely to see RSI clear the recent highs solidifying to RSI bull range.

From a relative comparative view when compared to the universe, Energy started stabilizing in late December, but as we noted the rest of the markets were running at that point. $SPY comp came back to a previous low and looks to be turning. The $QQQ which isn’t really a peer group, but could be telling if this failed breakdown in the ratio helps usher in a Tech to Energy rotation. Both $SPY and $QQQ comps are also threatening their downtrend lines which aren’t marked, but you can see they would be close by too.

Breadth here on the sector level (as well as in the subsectors) really started firming in January with higher lows in the short term measures and a Summation Index buy signal. AdvDec Line and other longer measures have not caught up, but are starting to turn themselves. Remember, breadth is a progression, not an event. 

 

As alluded to, this is early in this potential rotation, but many of the hallmarks are showing up. Another milestone we would like to see on any break of the consolidation is a healthy expansion in the new highs percentage through the blue boxes taking out the last couple of peaks.

Energy Subsectors

The place to be in this space has been in O&G Storage and Transportation. While record production might keep prices down for producers, it should and has benefited this particular subsector the most. Many worry about the high dividends (not reflected in this chart) and K-1s, but those can be avoided with some of the ETFs like $AMLP which has done very well over the last year. Equipment Services has had its issues, but it should also benefit from more production and is in the second slot. O&G Consumable Fuels would also include Nuclear, Coal and others outside of just oil and gas. It is starting to fade a bit in relative strength, but has the second best looking subsector chart and longer term RS score (black line in top window on chart). What it really comes down to is O&G Equipment Services and O&G Exploration and Production carry a lot of weight and attention in the industry and those two charts are just now basing out after a recent test of the range lows.

Energy Leaders

Since we are looking at the sector level, there are two different categories of leaders, ETFs and Stocks. In the ETF camp, we have a lot of MLP names as well a clean energy which have been trying to put in a reversal as well. $PSCE and $XES showing this is not just a move in the bigger names, giving opportunity to get involved in smaller or mid-sized names as they emerge out of downtrends or bases of their own.

When we drop down to the stock level, there is plenty to look at. Here I have filtered on the Energy Page, but you can also go to each subsector page and filter within just that specific group. I started with those that doubled or more the weekly return of our EW Energy index of 3.04%.  It gives a large group with some really big returns this week. That may give some pause, but doesn’t mean these won’t set up. The chart will determine your trading plan, but once you look at these charts you will realize many of these large moves are within a base or forging nice downtrend reversal patterns. The second is the RS movers list which has some of the same names as the big weekly moves. Since this is an emerging sector, I am not as cautious about high RS scores here as I would be if the sector has been leading for months. That said, also don’t sleep on the RS losers list, some of these names are leaders that have taken a break and are refreshing themselves. So don’t just look at the losers as potential shorts, often they are just setting back up.

Food & Staples Retailing

It has been pretty clear that defensive sectors have not been the winners in this environment. However, one subsector deep within that space has been making some noise recently and popped up in green multiple times in our snapshots above. Inside Consumer Staples you will find Food and Staples Retailing, which at first glance sounds pretty boring. Historically, this space was places like grocery stores which were known for very tight margins. But with the rise of the big box stores, it is now dominated by $COST and $WMT, which are great leaders, but let’s look a little deeper and see what else is in there. Oh yeah, and old stodgy grocery stores have even figured out how to increase their margins these days expanding into mini-big boxes of their own. 

The RS in the top of the chart is starting to hold above 50 after putting in a higher low where the box starts as price consolidated in a tight sideways range. Again, this was as Consumer Staples as a whole was going through a pretty rough spot. Price bottomed on the MA bands early on, based for a month and now looks to be heading out the top. The RSI bull range hasn’t wavered and CFG never got below zero showing decent demand during the start of the year pullback that lasted about 2 weeks.

Breadth only backed off on the short term measures, never giving up much ground on the AdvDec Line or MA breadth. McClellan Oscillator came below zero, but note the Breadth Thrust Indicator never got to 40 level which was another nice hint. The Intermediate McClellan Summation got a buy signal this week with the price breakout.

Consumer Staples are rarely going to be market leaders, but we can see here that Food & Staples Retailing is at least the clear best of the bunch outperforming its sector here with a fresh breakout this week in the ratio. Also, seeing $SPY ,$QQQ, and the Universe all with the potential for failed breakdowns is interesting as well.

Looking at the New High sections here we see there has been decent interest all along. Now these numbers also need to be taken in context of a subsector with 26 holdings, so the percentages can more more than some larger spaces, but still significant when you can get a large chunk making new highs all at the same time, definitely helps confirm interest in the space. 

Food & Staples Retailing Leaders

As far as stocks to look at, here we have three variations of the RS list for the subsector, you could go through all 26 names pretty easily, but here are some standouts. 

Below are a few charts outside of $COST $WMT $TGT $KR which all have their own benefits, but I want to see what else is out there.

This week there were plenty of areas to dive into as markets start to focus beyond Technology here. It is good for markets and those who are willing to do the homework. Hopefully, this gets you a good start to finding those opportunities. I am trying to get back more into video work, I will try to get some more sector and subsector looks that way soon. Even with the markets broadening out, if major indexes start to pull back in more earnest, it will drag many other areas down, but not all. Therefore, you will have to be patient somewhere; whether that be waiting for a better market environment, installing a looser stop preparing for more volatility or more research time to build a deeper conviction in a few setups. Patience will be part of the game. 

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!