Power Sector Review

June 2, 2024

Markets continue to put in mixed performance, but this week it switched with Small caps overshooting and seeing the strongest rebound into the end of the week. $SPY and $QQQ finally forced the backtest and survived. The complete breakdown of the Triple Play Charts went out in the Power Snapshots on Saturday. Below we will quickly review the daily and get to the Power Universe sectors and subsector breakdowns.

The Big Picture

This week really flipped the script to keep the broader view neutral instead of a more concerning outcome (which had potential mid week). We came into the week with $IWM trying to drag the others down with little success as it came into some potential support zones. Monday’s ugly reversal turned into a big gap down on Tuesday that stuck, but didn’t move too far from the open. This raised the negative rhetoric a few decibels, especially since $SPY and $QQQ were finally following. It was about that time the money that was rotating out of $QQQ and $SPY and the largest names out there was rotation over into the small to midcap names outside of Tech. As I mentioned in the other report, this is exactly what you want to see when names get stretched and see profit taking. It rarely means the bull trend is ending if it is real. Thursday saw strong breadth as that money continued into other spaces and out of Mega caps bringing down $SPY and $QQQ to the previous breakout levels. Both even went through the levels for Thursday’s close bringing out the failed breakout crowd quickly, almost like back tests are an exact science and must stop on the exact price point or higher to be successful (sarcasm as we should all know this isn’t how things work). I think you have to give it a day or so and/or a few percentage points of overshoot potential in most cases. This looks to have turned out to be one of those. Rebalancing caused some of the move at the end of the day, but intraday charts had already started coming off the lows before the last hour run amplified everything. I see the week as a positive for the broader picture even with returns being in the red.

The Power Universe pulled back into the MA bands and under the minor breakout it saw. $IWM never saw a breakout, but the Power Universe did by a slight margin and is now pulling back into the MA bands. I put on the Fibonacci retracements to show how shallow the pullback was overall which suggests strong underlying trend and also tells us it can go further and keep the major trend in tact. 38.2% retracement is the second arrow down and we didn’t even get near that in April before coming back to challenge the highs. The 1st arrow is the 23.6% retracement, price ended the pullback between those two which are the two smallest retracements we measure. It continues to hold the RSI bull range and reversed the second half of the week to help RSI get back over the 50 level quickly.

The Relative strength rankings put Utilities back on top even with Energy outperforming it for the week and beyond. That relationship is not likely to last long if Energy continues to emerge. Communication Services is another space that keeps showing up and this week Consumer Discretionary gets back in the mix after a couple of really rough weeks. Information Technology took the brunt of it through not only profit taking in the hot names, but also some very poor earnings reactions in the sector.

Snapshot Highlight

The Snapshot review has its own daily report now, so we be highlighting one of the spreadsheets each week that stands out in our research. 

I kept last week’s entry to show how we can be looking for a harder reversal soon, not necessarily the next day, but the repeat Wednesday of this week pushed further into the washout zone for a corrective trend. 1-3 of these days can be normal when forging a bottom, intermediate term. It’s a pretty solid signal usually. It is only when those days cluster together with a lot of frequency it suggests something bigger is afoot.

From Thursday 5/23/24 that we highlighted last week in this report and said:

“Here we look at Thursday’s short-term Breadth Snapshot showing new 10 day lows blew out quickly. A few moving average measures were starting to light up and Breadth Thrusts were starting to hit some minor washout levels in a few specific spots. Not nearly enough for a broad signal, but that’s not what we would expect here. We are getting to a zone that a reversal gets more likely in a corrective phase. Friday’s bounce back action was a good start to negating the liquidation break. Next week will decide.”

Wednesday 5/29/24:

This last Wednesday, the breadth stretch got deeper on the 10 day lows and Breadth Thrusts, but the Moving Average readings aren’t overly concerned. It is notable the Real Estate and Utilities were two of the most stretched and both put in very strong finishes to the week. Most of this was cleaned up on the bounce into the end of the week, but still leaves us on notice the sellers might not be done in the big names, but that doesn’t have to mean there aren’t profit centers. We just have to watch where the money is flowing to. Power Snapshots discusses that flow daily.

Subsector Relative Strength

While the Power Universe eked out a slight gain for the week unlike the major ETFs, many sectors and subsectors had solid weeks. There were some solid losers as well like Software and IT Services, but those were in the minority. Apparel & Luxury Goods, Specialty Retail and Telecom were out front by a lot. Energy and Utilities are still the only two sectors with a concentration of RS over most of the subsectors. Consumer Discretionary is a good example of a very bifurcated sector.

The subsectors below all put in better than 2.5% gains on the week with an equal weighting. After those top three mentioned above, Energy and Utilities are clustering. I mentioned the bifurcation above in the Consumer Discretionary sector, but Leisure Goods and Household Durables (think housing and related) put in leading performances as well after a bit of a rough patch off the recent highs.

This week Apparel & Luxury Goods moved up the ladder and Telecom jumped on the list along with Electric and Multi-Line Utilities starting to try and play catch up to the sector leader Independent Power & Renewables which continues to show strength in its trend. Finally Brokerage & Capital Markets snuck on the list this week too. The RS gainers gave a little different view highlighting the improvement in a few other subsectors just now moving up into the 30-60 orange zone after coming off bottom of the list readings last week. Worth a quick glance for those looking for new potential rotation spots.

Sector ETF Relative Strength

On the Macro Page on the website we cover sector ETFs separated into lists by the size of the companies. Here we are looking at them all ranked together to see who is leading overall and not just in market cap segments.

A lot of what we talked about can be learned from this chart. Utilities run hasn’t petered out and looks like the sector narrative has definitely shifted to the AI power play from the old and stodgy defensive sector. Not all of Utilities is seeing the high volume returns (I am looking at you Water), but most of the sector is playing along for now. Small Cap players were the biggest RS movers with outperformance in $IWM and small caps, but also mid and large caps, just those outside the big really popular names. Small cap ETFs in Energy, Utilities & Communication Services and Consumer Discretionary all responding to the absolute and relative strength.

Wrap Up

That rotation back into Technology was short lived as the biggest strongest names hit strong profit taking in the middle of the week. Luckily, that money was quickly redistributed through other individual names, sectors and subsectors. Small and Mid caps performed well this week, relatively, and took in a lot of the new flow at the end of the week. This came at an important and somewhat bad looking spot for $IWM. Markets do this to fool the most, and when they do, pay attention to what sectors and themes pick up the money. Small and Mid caps look ready to give it another go, even if larger indexes continue to flounder. As long as the big boys don’t nosedive, it gives another shot at catch up for small caps in the second half of 2024. The small cap narrative has tried many times in the last few years and hasn’t made it yet, so keep that in mind, but mean reversion over time (sometimes long periods) is a big part of the markets, so at some point it will happen. It would be nice to see and we will be watching for it, but not overly banking on it just yet. Let’s see how June starts and take it week by week as we go.

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!