Power Sector Review

January 22, 2024

Sector Highlights

As the major indexes remain in RSI bull ranges with large cap indexes making new all time highs and $IWM retracing small amounts of the strong 4th quarter run (for more see Weekly Macro Review). At this point in the trend and potential leg higher, we like to know and be aware of pullbacks and digestion stages so we can try to avoid getting chopped up too much. We also should realize that we are likely in the early stages after these large macro breakouts. This is important to accept, because it allows us to look at those corrections more as pauses and the time for rotation to refuel the markets for the next move in the trend. As long as we continue to see this rotation, we should continue to motor higher in fits and starts throughout  the year.  These rotations can happen fast with very little index reaction or slower leading to longer and deeper corrective periods. As long as important levels hold on the index, sector and theme levels hold up, rotation identification is the goal. In these reports, we are going to use the Power Universe as well as sector ETFs to drill down into the top spaces to be watching for the week.

The Equal Weight sector rankings lists below show all three time periods we follow. Health Care is on top of them all after being in the worst spot on all three just 3 months ago. This kind of action is indicative of a new leader. We saw very similar action in Communication Services early last year which remained near the top of the lists for most of 2023 until the end of 2023. Communication Services hasn’t really pulled back in price all that much, but as these show it has lost its leadership positioning. Health Care though has just recently moved to these highs, so we could see them stay up here for a while. Information Technology and Financials are also trading back and forth depending on the time frame you are looking at. The sector pages on these are good to look at and see how far the breadth and other relative strength measures have come. These are offensive sectors overall which can benefit from lower interest rate and strong market environment.

Next let’s take a glance at the short term breadth snapshot which is very neutral after Friday’s move. The more defensive, the less strength is showing with the exception of Real Estate which has a good bit of interest rate sensitivity helping it out. Consumer Staples, Utilities, and more recently Materials are all lagging. Real Estate was the 4th spot in both the 3mo and 6mo lists above showing some strength. These current looks aren’t screaming any new huge messages here to start the week, more confirming the leaders we have been seeing. The strength here in Financials across all the long term moving average measures is striking as a leader. Information Technology doesn’t surprise anyone, but it is leading for a reason. The industry is transforming, growing and innovating at a breakneck pace in recent years led by, but not exclusively because of, AI and its computing power. 

The subsector leaderboard is a breakdown of the sector views above with most coming from Health Care, Information Technology and Financials. However, you do see Household Durables from Consumer Discretionary and Construction Goods from Industrials slip in. These two related sectors are pointing at an expected bottom in housing and construction now that interest rates are likely moderating. Outside of those two, it is our leading sectors dominating. 

Biotech is and has been the leader for a month now, even with the pullback, but the big RS mover over the last week has been Semiconductors. While most see them as overbought, they took a break over the last couple weeks, and the buying seems to be overwhelming.  And don’t mistake this for just $NVDA and $AMD, these are equal weighted indexes, so its many more strong movers inside. 

Below are the RS Gainer and RS Loser sorts. The RS Gainers list is also littered with Consumer Discretionary and Technology subsectors. The losers list seems to like Financials and Healthcare. With no absolute winners to speak of, at least this tells us who is moving different from the rest.

Leading Sectors

Let’s go through the leading relative strength EW sectors from our RS list above. These probably don’t look like the ETFs you watch since they include all capitalizations. Even most equal weighted ETFs only put the top names in the mix, we strive to show a larger snapshot of the sector breadth and performance to help guide us where to dig deeper. Below are just two of the charts that are shown on the sector pages. There is more to see as well as multiple RS lists for subsectors, ETFs and component stocks on each page.

Healthcare

Health Care is the leader and has been off the lows from late October. Biotechnology was the key to the liftoff. The RSI bull range is strong across this whole sector and is holding up well in the current digestion. Relative comparative charts show how abrupt the relative change was of these recent lows. Thrusting action like that with this shallow consolidation can often lead to longer term outperformance. Also, noting that the RS has gone from low to highs and stuck there while it decides. Here is a link to the Healthcare page to dig further into the ETFs and Stocks in the space.

Information Technology

Information Technology is another sector that deserves the attention it is getting. Big name leaders are earning their reputations and continue to lead here, but this is another sector that looks to be broadening out. Below we will discuss Semiconductors, which I chose because they were on the RS Movers list, but I just as easily could have profiled the IT Services or Software subsectors too. This is a strong space all around and should be explored further from both an ETF and Stocks perspective on the Information Technology page.

Financials

Financials also showing current leadership that started last summer and continues to bounce around the top of the RS scores, but like others has really shown some unexpected vigor since the October lows and is now consolidating in an orderly RSI bull range. It hasn’t made its move back above the pullback trendline yet, but looks ready as it bounced off the MA bands. If it wants to pull back further and put in a hard test to the RSI bull range, the horizontal breakout line would be the next potential support zone. The Relative comparative chart is showing improvement against the Power Universe and the $SPY. This is one that might take a little patience if it doesn’t go now, but worth looking closer if the larger trend remains higher. Here is a link to the Financials page to further research the relative strength ETF and stocks opportunities in the space.

Subsector Reviews

For this week’s subsector reviews, I decided to pick one from each of the sectors we highlighted above. This drill down can help identify the leadership, whether ongoing or emerging. A few things to remember as we go through – these are equal weighted subsectors with securities going all the way down to $100m market cap and 50K 10 day average volume. I mention this because while this helps the breadth data, it can have some affects on the relative comparative charts when comparing them to $SPY and $QQQ, so keep that in mind. Also the RS scores on the top pane of the RS/RSI Charts come from the Universe page Subsector RS Rankings, so it encompasses all 51 subsectors in the rankings. There were quite a few that could have been put in this week, but these three give different looks from strong sectors, so I thought it would be a good mix.

Medical Equipment, Devices & Supplies

Since Health Care was the top sector, I figured I would start here. The current leader among all susbsectors is Biotechnology which remains strong and is resting after a strong move off the lows, but Medical Equipment, Devices & Supplies, from here to be known as Med Equipment has been coming on strong with rotation while Biotech is taking that break. The RS is incrementally increasing across all time frames, but plenty of room to move on the intermediate and longer measures. Price is in a pennant while RSI has fired a RSI Positive Reversal in its RSI Bull range while CFG hints with higher lows. The breadth here is still in the middle and never really made the strong break higher on the first leg in the 4th quarter and is also selling off less than other healthcare during this pullback with higher lows. 

The relative comparative chart shows its been climbing versus the Power Universe for a while along with $SPY, but is just now turning up versus the EW Health Care sector. Finally one of other pieces of evidence that drew me here short term is the percent making new highs and lows. The chart shows the short term lows started contracting early while the new highs are jumping out quicker than many other subsectors. We need this to keep improving, but it should help accelerate the breadth improvements if it continues. This may be the place for rotation in healthcare to drive the next leg higher with Biotechnology. ETFs in the space are $IHI $XHE $MDEV with the latter being very thin. Here is a link to the Medical Equipment, Devices & Supplies page so you can go to the bottom and filter down to find individual names worth exploring further.

 

Semiconductors

Semiconductors have been all the talk due to $NVDA and $AMD recently, putting the $SMH in new highs looking much like the $SPY CnH pattern, but keeping with our rotation theme, we think there are plenty of other names ready to take the reigns. The year started with a sharp pullback, minor low and then an overshoot of that low that was bought hard on Thursday and Friday of last week. This was all in the context of an RSI bull range and an oversold CFG with divergence. A very nice looking pullback setup using these tools. You can see at the top of the RS/RSI chart, the RS has rocketed back near highs to end the week going out strong. The breadth here showed only the short term breadth measures with much of the pullback, the longer term measures mostly digested it well. The Breadth Thrust Indicator (red in 2nd pane from bottom) was a good tell as it dove to short term washout levels twice.  

The Relative Comparative chart shows a recent trend line break versus EW Information Technology and the EW Power Universe while the comparative versus the $SPY looks to be putting in a nice higher low, as is versus $QQQ. At a minimum, I would think we test those old highs with a nice setup for a potential breakout. In the final chart it is quite notable the percentage making new 10day highs as we close out the week after putting in a nice divergence at the lows mid-week. This sector continues to look and act like a leader, I wouldn’t gauge it by just looking at the big 3 or 4 names, there are opportunities of all sizes in here based on this breadth outlook. The ETFs in the space are $SMH $XSD $PSI $SOXX $SEMI $SOXQ $FXTL $KFVG. Here is a link to the Semiconductors page for further stock filtering.

Insurance

Last, but certainly not least we take a look at Insurance subsector within the Financial sector. This has been a quiet leader for a while within the space and almost never gets any attention compared to Banks, Regionals especially, and Brokerage names. This might be the best looking strength setup of the three as it consolidated sideways this whole corrective period and broke out to new highs on Friday. The RSI has been putting in hidden little RSI Positive Reversals as it moved sideways. CFG has been gaining strength. Breadth in this space remains stellar and has showed no weakness at all. This is a space with all cylinders firing.

The Relative Comparative chart is showing an abrupt change in strength versus the Universe and the rest of the EW Financials while it moves sideways versus the $SPY. Remember, these equal weight indexes have a lot of small names in them, so to hold its own versus the $SPY during this pullback for small caps is an accomplishment and net positive. Finally we look at the percentage making new highs and lows and see this continues to chug along, consistently seeing decent new highs which start expanding more than the broad markets this week. ETFs in the space are $IAK $KIE $KBWP. Here is the link to the Insurance page for further stock filtering.

The markets as a whole finished the OpEx week with strength and now we will see how they transfer that into a tougher week ahead. Earnings is coming up, so make sure you are paying attention to that with any new ideas. Hopefully this sector report will give you some solid fishing lanes if the market weather holds out. Of course, you should always take this information and either run it by your investment professional or make a full trade plan, identifying the risks before committing to them.  

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!