Power Sector Review

January 29, 2024

Sector Highlights

The Major Indexes continued to chug along this week. $IWM led the charge with $QQQ leaving behind an ugly weekly candle, but still gained. The Weekly Macro Review covers this and more if you want to get up to speed before diving into the sector world. Breadth also continued to improve as the week went on. Market chopped a little this week and we certainly could see the cap weighted majors take a rest at anytime, but overall look to be firing on most if not all cylinders at the moment.

The EW Sector RS list below shows no change in the top three this week, but some other jockeying was definitely present. From an RS standpoint, Industrial edged up again and Communication Services jumped 19 RS points with the 2nd best weekly gain at 3.62% behind Energy which came in at 4.09%, but still sits near the bottom of the RS rankings for now. A big question on everyone’s mind is when the Mega-Tech acronym names are going to pullback from extended runs, and what that will do to the markets. Right now we are seeing markets broaden out on the way up, so it could turn out to be a fantastic rotation. So much has been made on this big run in equities. If investors are getting more confident, that money could easily rotate to the rest of the markets. Remember the $RSP equal weighed S&P 500 is only up .31 so far this year versus the $SPY up 3.23% and $XLG up 5.24%. There is a lot of room to catchup for stocks of all sizes, not just small caps.

Short Term Breadth Snapshot showing where money was moving to end the week. Communication Services stands out along with Energy, Financials and a few other stragglers. On the downside, Utilities continue to be the anchor.

Moving Average Breadth continues to look a bit better. Here we could also add Industrials to the up and coming list confirming what we were seeing in the RS Ranking list. Financials are really strong on these measures with Energy and Industrials also showing some green clustering. Here too, we see Utilities as the worst of the bunch.

This week I was able to complete two new Snapshot spreadsheets to help find buying pressure around the markets. No matter how deep you want to dig, it helps to know where money is flowing and with what type of vigor. The first is the percentage of stocks that are making 10, 21 and 53 day highs throughout the universe. Here showing a lot of green currently in Communication Services and Energy with Financials behind that, this helped influence choosing these three sectors to highlight today.

The second sheet, buying and selling pressure measure percent days. In breadth signals, 90% decliners and 90% declining volume day or back to back 80% days are usually a sign of exhaustion and suggests the markets see a strong short term bounce within 3-5 trading days. This measure was most often done of the NYSE and is a pretty rare occasion there and in our Power Universe. It is also rare on the sector and subsector levels for most cases. Of course, it is about the math, the less components a subsector has, the more likely it is to see an extreme like this and the less significance it will carry. It is a signal we have watched for a long time now and believe it will be nice to be able to easily spot them across all market segments.

Now that we have moved through all the breadth snapshots, let’s take a look at some relative strength readings. This week I decided to give a different view of all the subsectors. Instead of sorting by current relative strength, I moved that to the second sort, behind a sector grouping. This way we get sector groupings with subsector readings. A quick visual scan shows most of the green reside in the Financials, Health Care and Information Technology, all of our leaders, but after that, Industrials has the most subsectors creeping up the rankings. We should keep an eye on that. I didn’t cover Industrials this week, but it was definitely interesting as I scanned through the space. Energy might have been the top performer this week, but it isn’t enough to move the subsectors very far up the list, with the exception of O&G Storage & Transportation.

Below are the RS Gainer and RS Loser sorts. This list shows the daily gainers that outperformed all the major index ETFs on Friday and the second does so on the weekly time frame. All of the Energy subsectors are on both of these lists helping solidify as one to review this week. Communication Services and Financials also putting in decent late week strength and catching our eye for a review.

Sector Highlights

This week I chose sectors to review by how they performed for the week, but with a focus on how they performed toward the end of the week as the broader markets struggled. I also am going deeper into sectors this week giving some insight into subsectors, ETF and stocks that can be reviewed in each one. Remember though, these represent select views that I chose, there is a lot more to discover if you want to dig yourself on the site pages.

Energy

The Energy sector led for a bit last summer, but stalled with the markets and hasn’t been able to get going since the rally started in November. It took a couple of fits and starts since then which included a failed breakdown to have many investors shying away from the space. However, there are a few things aligning at the moment that could change that picture. And with it only being 3% of the S&P 500, if one can overweight during a time of sector outperformance, it can make a notable difference in a portfolio’s returns. 

First, the performance this week when the rest of the previously rallying markets began to stumble is what got our attention. Next we start seeing both absolute and relative performance of $USO in our Intermarket ETF list. Finally we are coming into some seasonality for both crude and Energy Stocks. These signs are speculative and early for the most part as you can see in the first chart the recent price strength hasn’t turned into relative strength in our RS measures yet, but RSI did hold 40 in the last pullback and made a higher low before reversing and running strong this week. The breadth has also been moving sideways to down since the summer bleeding slowly until this week when the short term measures took sharp turns, even pulling the intermediate and longer term measures higher with the move. Relative Comparative versus the Power Universe has been flat for a month while versus the $SPY it is trying to put in a double bottom and break the downtrend from summer. Overall price has moved more sideways than anything, but has been disappointing as everything else has rallied. With what we discussed above, it would make some sense for moneys to rotate here over the near-term, possibly forcing a breakout in the space. If this is to become more likely, we want to see the new 63 day highs expand above the line drawn on the chart at or before price breaks out.

Energy Subsectors

Below we have the Energy subsector RS Rankings list and in the order of the list below we have the relative comparative chart for each subsector letting you know where each one stands. If you want to go further, head over to the individual page from the menu bar at the top. O&G Storage and Transportation has been the clear leader here while O&G Equipment & Services are coming on the strongest by many measures.

Energy Subsector Relative Charts

Energy Leaders

There are plenty of ways to sort for leaders in the space. Using the ETF list on the site, we can start with those that outperformed our equal weight index for the week giving a robust list to drill down into the charts. Another way to go is the RS movers filter which only shows the ETFs on the list that moved up or down 20 or more RS points this week. Oil & Gas Equipment Services quickly went from laggard to outperformer this week in a strong move.

Even though this is officially a sector review, I thought I would leave you with the leading gainers within this sector this week to dig deeper. This was just one quick sort I did and thought it provided a nice set of names to look at. Leaders in an emerging, but recently lagging sector are usually not too far gone to find a spot for a trade or even a breakout play of a larger bases that has been building. You can sort and filter these RS lists many different ways to find the best names to explore further.

Communication Services

Communication Services was a great find at the beginning of last year after a couple of years of underperformance. It rocketed higher in the first quarter and then bounced around all year in our charts while the cap weighted $XLC showed good strength most of the year, pausing for a couple of months during the summer. Our EW subsector launched off the failed breakdown in late October through the end of the year. 2024 started with a classic ABC retracement that bounced hard again right back to the highs over the last week or so. Great price action to see from one of last year’s leaders. The breadth chart is showing good improvement in long and intermediate measures after seeing the short term measures surge again off the recent lows. Relative comparative charts are showing strength and in multiple cases forming failed breakdowns versus the Universe and other major ETFs. Finally, we are seeing good healthy clips of new 10, 21 and 63 day highs in the sector to support a potential secondary breakout after a quick back test of the primary breakout at the end of 2023. All this making it worth a deeper dive for emerging opportunities.

Communication Services Subsectors

Communication Services only has 3 subsectors and currently Media & Entertainment is leading and getting the most buying pressure. Interactive Media & Entertainment also made a sharp reversal this week and are worth watching too. Then, there is Telecom, a normally sleepy sector moving to new highs as it hasn’t seen the volatility the rest of the subsectors have during out of favor periods. There is plenty to work with here in the sector for different types of investors and trading styles.

Communication Services Subsector Relative Charts

Communication Services Leaders

Here we see the sectors that outperformed the EW Sector this week and below the RS Movers. The smaller list is reflective of the smaller number of ETFs in the space.

The top performing stocks of the sector for the week can be a good start to look to narrow your chart reviews. It contains a ton of RS movers that always draw my eye for further chart review.

Financials

The final sector we will review this week is the Financials sector, a recent leader that continues to look great and hold up very well right here. The first chart is the RS/RSI chart showing the RS in the top window has been strong since last summer and the RSI moved into a strong RSI bull range in November as this current rally ignited. The Breadth chart shows a lot of strength in the NHNL differential, Adv/Dec Line and %>200sma (all the long term measures we follow). Intermediate measures in the %>50sma and McClellan Summation are both relatively strong with the summation on a sell signal here currently, but at a pretty elevated level which often reduces the sting. That indicator has also flattened hinting it might be ready to give another buy signal if the McClellan Oscillator can stay above zero for a bit. The Relative Comparative charts are in longer term uptrends. The percentage making new highs/low also remains robust across all time frames. Not extremely strong, but solid.

Financials Subsectors

The Financial subsector rankings list has Thrift & Mortgage Financing on top for a while now with Diversified Credit Services behind it. Regionals and Major banks are right in the middle of the pack with Insurance and Brokerage & Capital Markets at the bottom. These rankings tell a different story than the ETF world due to the market capitalization dependent nature of this sector. One example is Insurance ETFs, which are dominated by the largest companies, showing much stronger RS rankings within the sector ETF list than the EW Insurance subsector is. This is where we see all these measures just help filter us down to better opportunities, but price action is where our final decisions are made which is why moving you to the chart is our goal.

Financials Subsector Relative Charts

Financials Leaders

Financials ETF leaders beat the EW sector performance for the week. This is another fairly short list comparing to the number of ETFs on the list. The RS Movers list is tight as well as separating less traditional funds this week. $BPAY and $DFNL made both lists.

Finally, we have a group of weekly top performing stocks within the Financials sector, many of which come straight from the top two ranked subsectors.

Subsector Highlight

Since we covered so much ground above, including a glimpse into many subsectors, I decided to pick a single subsector this week that we don’t want to forget in the search for emerging opportunities. Biotechnology continues to be in the top subsector RS spot since taking it over late in the year. The first chart shows that as well as a very strong RSI bull range putting in multiple RSI Positive Reversals as price continues to try and correct with very little success. This monster subsector has over 225 names in it currently and has a ton of strong performers throughout its ranks. The breadth here back filled a little on short term measures and very little on long term measures, which were so depressed at the start of the move. They aren’t any where near stretched here. Instead, it looks more like they are warming up for round two. The Relative Comparative chart shows the Biotechnology space is giving up very little ground and still leading pretty much every comparison. The Percent Making New Highs/Lows chart is not too exciting here like some of the others we have looked at this week, but it is building again on the shorter measures. The longer measure on top shows almost no new 63 day lows since it started climbing in November, even during the pullback. 

Biotechnology

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 Health Care spaces 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 Health Care 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.

Biotechnology ETFs

Biotechnology ETFs are filtered out below from the Health Care ETF RS list for digging into. While large cap ETFs can often lead in this space, we might want to watch the ones that are more equal weighted or focus more on small and midcap names since the space has been seeing so much M&A as of late.

Biotechnology Stock Filters

Below we have two different ways to filter the stocks in the space providing lists of names for chart review.

This week we took a little different approach to going through the Power Universe sector and subsector world including ETF lists that can be valuable ways to play a space. With a lot to go through as we start the week, hopefully this can help narrow your search and save some time that can be allocated to building a better trade plan. I use this to find my own ideas for the week and hope to share more individual names, ETFs and their charts as the week progresses. Until then, good luck out there!

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!