Power Sector Review

February 26, 2024

The Big Picture

Both of the large caps, $SPY $QQQ snapped back this week with gains while $IWM gave up what it eked out at the end of last week. Not really damaging, but also not exciting. Large caps can keep moving higher or sideways if they broaden out from the biggest names while smaller and midcap names have a chance to breakout here. So far, seasonality hasn’t been able to throw its weight around as we discussed in the Macro Review, so we will go with what we have until that dynamic looks like it’s changing. 

Our equal weight sectors continue to be set up in a positive or offensive structure even through this week’s Tech slip. Yes, Information Technology was down almost 3% on the week even with the big $NVDA move that allowed everyone to breath into the weekend. Health Care continued to lead and has already broken out while a couple more sectors are very close. Even those stuck in the middle still resemble accumulation versus distribution as they bunch up under the highs. Energy and Materials gained the most in RS points. The leading percentage gainer for the week was also Materials making it an intriguing sector to look closer at. Communication Services has been losing some RS steam this quarter under the hood while $XLC has remained strong. That should be watched for incoming weakness or an upside catchup if the smaller market cap names wake up with a broader small cap move. 

Snapshot Review

Remember, the reason I call these “snapshots” is because they are just one day’s data points 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.

As mentioned, everyone breathed a breath of relief after the $NVDA earnings, but the bounce wasn’t as robust as the selloff was damaging in some of the broader short term tech views. In Technology that is, in some of the other sectors, things have been fine. Industrials and Consumer Discretionary are still getting action and Materials has come on the scene. Consumer Staples also took in a bit of flow as the defensive name sake. Utilities still doesn’t seem to be really ready to join in.

Moving Average Breadth is still predominately above the midline on most levels, but not hot enough to be green in many spaces. Precious Metals still dragging the bottom, with short term moving average readings in Regional Banks and Thrifts & Mortgage Finance Subsectors in the pink, it sets up a potential snapback to be ready for, but don’t anticipate and expect right away. Most of the Financial subsectors still sport very strong %>200sma readings across all of them, so the short term weakness is worth paying extra attention to for the next direction.

The beginning of the week started rough again for the majors and much of the broader markets as well, but we see they ended with a good bit of new highs readings in the green. On the Lows Snapshot, there are a few sporadic pink spots with the only clustering still in Utilities, but in a couple of subsectors with very low component counts exacerbating the percentage swings when they occur. Semiconductors on the list might surprise many, but has been showing some stall under the hood for a week or more. You can also look at $XSD the equal weight semiconductor ETF has been forming a symmetrical triangle near the highs for most of 2024.

Recent emerging sectors saw the biggest snapback to end the week with Consumer Discretionary and Industrials leading the clustering, both of which remained standouts this week. Food & Staples Retailing was strong most of the week as well, which is nice after last weeks highlight. Overall the week didn’t end with a lot of excitement.

Subsector Relative Strength

Outperformers over the last 5 trading days (remember last week had a holiday on Monday, so this includes the previous Friday’s action) were not nearly as robust this week with smaller names being down for the week, but a few pulled out ahead of the rest. Basic Materials and Chemicals jump out from the materials sector being the only two from the same sector that made the list. Banks subsector, concentrating in the larger institution has made a clear break from the Regional Banks that have been underperforming since the FED meeting and higher inflation numbers. 

 

Once again, we have Biotech still at the top and really a small number of changes with Banks and Food & Staples Retailing entering the RS Leaders list this week. Out of the 13 names on the list, 3 come from each of Health Care, Financials, Industrials, and Consumer Discretionary sectors, with Food & Staples Retailing being the odd man out again.

In the bottom list, I concentrated more on the weekly RS Movers to see more of what has moved up the ranks during the overall sideways move in the Universe.

Zooming In

Materials Sector

The Materials sector caught my attention again toward the end of the week with the RS moves from Basic Materials and Chemicals subsectors. On the sector level, it was one of the larger RS movers this week as well. In the charts below we will see this one is setting up as a sector and has been firming under the surface, but the price move is not showing just yet.

The RS scores in the top window are still bouncing around the bottom and didn’t really  turn up much until this week, so they have a long way to go before we can consider things strong. The RSI is in no man’s land, but has stared to lead price a little after two bullish divergences so far this year. This in the context of a pullback near 50% retracement of the initial move.

The Relative Comparative charts have been in downtrends since the December price peak and are just starting to hint at turning up.

 

Breadth is steadily improving from the shorter to the longer time frames. The McClellan Summation crossed both the signal line and above zero this week preparing to challenge this recent range highs.

 

We are also seeing the right type of action in these readings too, just not very robust. It would be much better if we see them break higher into where the boxes show we were in the late fall. I think this will likely perk up with a breakout if we get one here.

Materials Subsectors

The subsectors all act differently in this space and can separate more in performance within the sector than many others do. Basic Materials is the clear leader with its construction ties while Precious Metals has been a big drag on the whole space. Currently, it is teasing at holding this support, but let’s see a more solid reversal take hold and then we will talk. Chemicals had a good week and looks to be emerging from its small base here. We want to see the RSI clear the 60 level to get a clean RSI bull range shift. Finally, Industrial Metals looks a lot like the sector as a whole, but can move fast if it gets over its own breakout zone here. All except the Precious Metals are currently showing relative strength improvement as well as some price and structure improvement depending on the stage they are in. Nothing here is anywhere near overbought and is a very small percentage weighting in the major indexes, so any attention and flow here has plenty of room to expand.

Materials Leaders

The ETF leaders have been stable for much of the month, no RS movers showing on the list for the weekly view. It hasn’t made a strong move yet as a sector and much of ETF world in this space is also sitting just under breakout levels. The Cap weighted diversified names here $XLB $VAW $FMAT are standing out other than $PKB which has been the leader in the space for a while following the housing strength.

On the stock level, we provide two different views. The RS Movers screen and the Weekly gainers, both having some decent looks if you dig in. Some of these have broken out after long bases while others are just trying to emerge from bases after longer downtrends. Below the lists, I dropped a few marked up charts for review.

Construction Materials Subsector

The first thing to note is, contrary to the name, this subsector finds itself in the Industrials sector and not the Materials sector where the Basic Materials subsector rests. However, this subsector deserves a mention as it has been a leader for a while and looks to have set back up for another tight breakout as the momentum continues in the space.  

The RSI has been in a bull range since the larger trend started back in November. The pullback to start the year was shallow giving a hint at the leadership still in the space which forged another breakout in early February. Following that breakout were a couple of weeks of digestion now looking for another smaller breakout to solidify the back-testing action.

Breadth in the space has seen the longer measures in strength for the rally we are currently enjoying, but the AdvDec Line uptrend extends back much further. All of the shorter term measures have been making higher lows since the initial liquidation at the start of 2024. Nothing here says imminent weakness.

All comparisons are heading in the right direction, even the ones you wouldn’t expect it to lead.

Here we see the new highs remains in a good high zone. If there was any complaint it would be the lower high spikes on the highs (I know that is getting picky); so if this breaks out for us, we want to see a nice spike and expansion back closer to those old January highs in the readings. Note, there are no recent 63 day lows to speak of and haven’t been since this move began.

Construction Materials Leaders

Here we have the weekly gainers and RS movers to dig in for a few names.  Many of those leaders are in strong trends higher, nothing wrong with the action, it just makes it harder to enter those already in full stride. A few charts at the bottom look like they are potentially setting up for moves higher with the rest of the sector breaking out again.

We continue to look beyond Technology for places to invest and are not finding it hard to spread things out. Many sectors are and have been performing well, albeit not at the velocity of the biggest tech names, but well by any other comparison. It really has been a site to see some of these behemoths move 20 plus percent or more in a day, but that is not the bread and butter of real money management. I still feel seasonality this year could just be a big rotation out of some of those recent stars into the lesser known performers, but we will have to follow and see if that is what happens. It may still show negative in the $SPY and $QQQ while it happens, but keep an eye on the $IWM. If it is showing relative and absolute outperformance, it will help confirm this is actually taking place.

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!