Power Sector Review

March 18, 2024

The Big Picture

Another lively week as we went through the quad witching options expiration as well as some air coming out of Tech, and low and behold, the markets survived. They were down across the board with a decent amount of volatility. All the daily charts on the triple play are still in RSI bull ranges. $SPY RSI is still holding pretty high, while the two higher beta indexes are coming off more and may even test the RSI bull ranges during this as they tangle with the MA bands here. This could easily unwind more, but if it goes with the recent mushy trends, buyers could show up again this week and keep grinding. The key is it doesn’t have to be in Tech. Cap weighted indexes will feel the pinch as long as Tech and related spaces settle, but the rotation into other sectors is working fine during it. The rotation from Tech to Energy and Materials takes assets from the largest weight and moves them toward the smallest weighting, how can this be bad if you can see it and participate as it’s happening?

The Power Universe EW index came back with the markets to end the week, but held its breakout back test into Friday. It can certainly still turn tail and break it, but all we really see h here is two weeks of sideways action after a breakout. That is not a bad narrative to be working from at this moment. As we break down the universe below, you can see Tech and Health Care took the biggest weekly hits as previous leaders finally ebbed a little. It is also notable that Utilities and Real Estate did poorly as everyone recalculates the potential for the FED to reduce its action. Again, hard to be too upset when this action is due to the economy staying stronger than imagined with the current restrictive policy stance and CPI being stickier. In the larger view, these are not bad situations for the economy to be in, just makes it more difficult for the FED to act sooner.

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 to see 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.

Friday short term breadth didn’t really improve much in hot sectors after Thursday’s selloff. Energy and Materials were joined by Industrials doing the best.

Moving average breadth is pointing at the same sectors, Energy, Materials, Industrials and Financials, maybe even in that order, but most readings are still hanging in the middle. Semiconductors is a standout, going from the top subsector to having the lowest percent above the 20 day moving average to close this week. That was a quick change in character. Now, we will see if it was enough or not.

Buying on Friday remained concentrated as you can see in the 3 main sectors we mentioned above. The Lows Snapshot was a good bit more indiscriminate attacking both offensive and defensive sectors alike.

A little shell shocked from Thursday, Friday selling was less aggressive and more about settling OpEx and trying to figure out what just happened. These sell days were distribution days adding to the market’s message.

Subsector Relative Strength

It wasn’t that hard to outperform the major indexes this week, so many of the subsectors did it. However, when you look at the strong gainers versus strong losers for the week, the sellers definitely won. From just the relative strength color coding, the resurgence of Energy and Materials is clear. Industrials remains a clear leader while Health Care is holding on. Financials have a big drag currently in Regionals and Thrifts & Mortgage Finance, while the top subsectors are doing well. This isn’t that unusual to see bifurcation within a sector that is leading. Interestingly, Biotechnology was down again pretty big this week and yet it still holds the top spot for 3mo RS for subsectors, a testament to just how strong that space has been since late last year.

Relative Strength leaders did not change all that much this week, only adding Precious Metals to the mix replacing Semiconductors as they fell off the list. Broadening out of Technology has been happening for a minute now, but this week it got noticed and hit the next gear it seems. It may not be a long term switch, but this week it got a lot of attention. The RS Movers list has an odd bunch on it to close the week. Semiconductors was big leader to land here. Utilities had a pair of subsectors on the losers side as this space isn’t showing any sort of defensive nature at the moment.

Zooming In

Energy Sector

We covered the Energy sector in this report almost exactly a month ago. Back then, we admitted it was showing relative strength, but was showing us some emerging signs as it came into its own seasonality. Crude Oil moved out of its RSI bear range on the daily chart in mid-January and held that range on the pullback that followed into the end of the month. We are currently sitting at the 50% retracement level of the down move on the daily, so some consolidation here wouldn’t be that unusual. A run right through it would be a little more rare and much more telling as to where we are. On the weekly chart we are nearing a big downtrend line as price hits the 23.6% retracement level here. A break of this zone could easily send crude to the previous peak or 50% retracement which is the blue box I put on the weekly. That level is a milestone and if it handles it well, we could continue to move back up the right side toward the 130 highs over time. If the economy is and has been stronger than anyone expected over the last year and geopolitical issues aren’t abating, this space has a long runway if it gets going. 

One of the other reasons I like paying attention here and Materials is the size of the sector in most portfolios that are S&P 500 driven like so many are today. With Energy at 3.7% weighting and Materials at 2.3%, these are very inconsequential sectors when they are out of favor, but if we can catch them and participate through overweighting when they are in favor, it provides significant alpha during its tenure. In a rotation market like this one, it’s a great strategy to pay attention to. I know it doesn’t exactly work this way, but if 10% of the Technology allocation were to shift to Energy through profit taking and rotation, that would almost double the size of the sector weighting and add significant gains to the leaders and the forgotten values buried deep.

The sector level charts have shaped up a good bit since we talked about them last month.

Our short term RS scores have been on the rise since mid-February and the RSI made its move back over 60 in nearly march and now is on Nitrous. It is a nice looking breakout after a well formed consolidation since September last year. CFG is hitting the 100 level, so it either accelerates higher for a bit or loses momentum in the short term near here. The momentum leans higher as we aren’t extended on the RSI itself.

 

 

The Comparatives showed bad underperformance as the markets took off late 2023, but since the start of 2024, that has really flattened out and are now turning higher against all involved. If this takes and starts new relative trends higher, it is still pretty early in this relationship.

 

Breadth has been improving across the board lately, the longer term measures have taken note and are moving. The Summation Index is not back above zero and running higher. However, the one that sticks out today is the %>20sma which is still stuck at the level it peaked during the highs of this base. A break above here would be nice to see with any continuation we get this week.

 

This is the only sector you are seeing this kind of buying pressure over the last couple of weeks. This is exactly what you want to see from a potentially emerging trend. Now we have to see if it can hold the breakout and if it does back test, then how do these readings react.

Energy Subsectors

Looking at the subsectors, they have flip-flopped over the last month. OG Storage & Transportation held up the best during the sector malaise. The large dividends and storage costs helped the space remain not only top of the sector, but a strong performer as you can see below. OG Equipment & Services has moved back to the top which makes sense with all the drilling and production that is being done here in the US. It is also benefiting from the heightened geopolitical risks right now. OG Exploration & Production is a mixed bag, but starting to come on stronger here as Crude price rises. These companies margins will benefit the most from a rise in price. Finally, we see Consumables as the laggard, but maybe one of the best set up subsectors of all. The chart below shows this subsector took a quick hit back in October and has quietly moved its way back to a potential breakout. This space includes things like Nuclear, some Coal and other energy sources, so it can also be an interesting one to dig into when it starts moving. This week I give you two views of each subsector to gauge, but always remember you can go to the menu at the top of the page and visit any of the sector or subsector pages to see the big picture.

Energy Leaders

This sector has a plethora of choices in the ETF space. The leader here is a little suspect as it is categorized under a clean energy fund, which are in this sector, but has a lot of technology and other sectors in its holdings. The rest though are pretty pure Energy ETFs. Most of the clean energy are at the bottom of the list and aren’t even in the RS losers section below because they have been at he bottom of the list so long. Oil and Gas is where it is right now, but don’t sleep on Uranium as it might be setting back up itself.

In this sector many of the big names everyone knows are already running and have made large weekly and monthly moves. There are many smaller names just starting to exit bases and put in some larger moves themselves. The thing here is even with some of the large short term moves, the zoomed out views show big upside opportunities for both the breakout side and the base reversal names. Now, some charts still look terrible, and those are not the ones I am looking for catch-up from, but the laggards that just took a little longer to set up or are forming smaller continuation patterns after strong initial moves are popping up more and more here.

Below are a few sector ETFs and a few of the stock charts that caught my attention. This is just a start. Always do your own due diligence and take ownership of any trade you decide is worth your efforts.

OpEx week did not disappoint with its volatility, but I think we will get more information about character of the markets and any potential direction change this week. There was a lot of premium crowded in the spaces that got hit hardest last week. Since that is out of the way, we might see more true colors coming out. If we are heading into a bigger correction, I would expect defensives to be doing better than they are. It feels more like a profit taking rotation than it does a larger setback. As far as we are concerned, as long as the money is moving somewhere as opposed to leaving, we are happy.

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!