Power Sector Review

March 11, 2024

The Big Picture

The week ended up with strong tails on the majors and not much in between. The $SPY put in a doji and $IWM was close enough for government work, while the $QQQ put in a bigger body, but did not engulf the last candle. This action after strong moves is a signal of indecision so far, not a reversal. It can be a caution to some fatigue and to pay more attention to rotations. We did see some defensive spaces lead the week while the leaders took a break. We don’t have any confirmations of major reversals and the trends have been very strong, so wait for confirmation. While we wait we can be paying attention to shifts in flow and sector resilience to gauge how aggressive a pullback might become. No way to pinpoint it, but markets will give clues along the way.

The Power Universe index did not take a break this week eking out a small gain with the help of small and mid caps. We are still of the mindset that even if the major indexes like $SPY $QQQ correct here that money is likely to spread out among other names, but we believe it will remain in the markets and looking for opportunities during any pause we see.  Materials kept moving this week with Precious Metals finally joining the other subsectors with a band. Utilities were the second best performers. Financials which we look at below snuck in with a respectable 1.7% gain. The big losers for the week were Consumer Discretionary followed by Communication Services. Information Technology fell on a relative basis while only giving up a little over a half a percent for the week, just a little less than $SPY. Friday had some large reversals on the fastest running names, so we will see if those stick going into OpEx week. I expect a pretty volatile week as the OpEx forces may also have to contend with more rotation out of the hot spaces. Since all this is happening on a week we are looking for confirmation of the reversal candles, don’t react too soon with volatility, likely in both directions, to be expected.

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.

The snapshot views are now a daily post with a new weekend view giving a review of all the snapshots from that week, so check them out as well. We ended the week decent buying across most of the markets, but specifically excluding Information Technology, Communication Services and Consumer Discretionary. The last even showing some new lows creeping up on the page. It is notable that Utilities, Real Estate and Consumer Staples are getting some attention here, hinting the trend might need a rest.

Moving Average Breadth still has some spots of strength remaining with Financials showing the most highlighted readings with Utilities next. Remember, we put these in context since Utilities has the smallest number of holdings of any sector, but it is still showing some push here. Materials and Industrials continue show some good numbers as well here. Materials seeing Precious Metals making big moves higher this week. 

This is still a bull market, so we can see those proceeds from the hot areas selling are going other places. Real Estate and Utilities pushing up here into the end of the week sends a message some are starting to leave the party spots for some more conservative areas. More importantly, new lows are not expanding except for in Consumer Discretionary. 

Semiconductors sold harder than they have in a while Friday as the trend has been strong and large short term reversals showing up in many top names. On the other side, buying was strong in Real Estate and Utilities as the fears perked up. This was a little different than recent Fridays as it seems there is less appetite for entering and holding over the weekend, except in the defensive names.

Subsector Relative Strength

Many subsectors handily outperformed the major indexes here this week. $IWM led the way with a return of just under .5% for the week. Precious Metals led with a huge gain. The list as a whole is definitely missing many of the usual suspects. Industrials and Materials are still working, but the addition of all the defensive subsectors, even Health Care Services is the most defensive subsector in the Health Care sector and has underperformed during this big sector leadership, until now. These are clues we might be getting our seasonality even if it is abbreviated in some way via time or magnitude.

Biotechnology finally had a losing week, but didn’t lose the throne. In fact, the top RS list showed some movement, but didn’t really see much for new faces outside of the Energy subsectors. The movers list on both the weekly and monthly view show some movement into defensives as well, but they are not dominating the lists as of yet. It is early in the rotation and could prove to be short lived, but if it continues through this week in-spite of OpEx positioning tugging at it, it will give an extra piece of confirmation of the intent.

Zooming In

Financials Sector

The Financials sector came into the year a leader and moved sideways while markets continued to march higher. The fear in the Regional Banking space has overshadowed strength in other areas like Insurance and even larger Banks which we will see. It has been stuck in the middle for the most part and looks like it is trying to start the next leg higher with this week’s breakout.

The RSI has remained above the 50 level on all 3 measures during the entire sideways action. Our chart shows the equal weighted index came back to the MA bands twice and found support before breaking out. This action allowed the RSI to reset in the bull range as the CFG go oversold.

 

 

 

The Comparatives haven’t made their move yet, but stopped going down and have been basing for about a month. A sharp move breaking these lines could confirm a new focus on the space.

 

Breadth in this space has also remained strong from a longer term perspective. All of those measures held very well during the pause. The Intermediate measures gauged by the %>50sma and McClellan Summation moderated, but didn’t ever get weak, while the shorter term measures did weaken a good bit on the first move down to the MA bands, but showed decent divergences on the second test of those MA Bands. 

 

While the price action was pretty solid this week, we are not seeing any buying rush here pushing these readings to spike. They were solid, but we aren’t seeing any excitement yet.

Financials Subsectors

The subsectors in the space move with some similarity, but definitely not any kind of uniformity. Regional Banks and Thrifts & Mortgage Finance move pretty close, but the others have their own drivers. Leadership also rotates in the space fairly frequently. The drag recently has been Regional Banks, but many look to be shaping up and below, the relative comparatives are trying to turn. Insurance first, and now Banks have been leading the sector for a bit, but Diversified Financials & Credit Services has been the most consistent off the November lows. Brokerage and Capital Markets has some strong names in it as well, but being such a large subsector as far as holdings, those strong names get washed out by a lot of underperformance elsewhere, but is still one of my favorite spaces within Financials.

Financials Leaders

From an ETF perspective, the market cap weighted broad ETFs have already broken out and are moving higher well. The more narrow spaces are where you might find more tactical opportunities. In the charts at the bottom, I have included $IAT $IAI and $FINX.

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. With the fear and rhetoric around Regionals Banks coupled with the chart looking to breakout, it is no surprise that many of the names on the lists below are from the Regional space. These are just two sorts, you can do your own here or drill down further to the subsectors from the Financials Page. Below I have chosen a few charts to highlight the types of potential opportunities that can be found in the sector.

OpEx week is a hard week for us to make any big changes without a big reason. You still need to be diligent and make the changes the data prescribes, but also give a little more leeway for volatility than a normal week and calculate that in. I prefer to move most changes to end of the day or end of the week during these weeks. It helps me cut down on some of the whipsaws you can see. Another reason not to be too quick to hit the exits is we still don’t have any confirmation of most of these fresh reversals, so measure that confirmation however you choose to, but make it check that box and don’t jump prematurely.

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!