Power Sector Review

May 13, 2024

Mid week we got hit with a GICS sub-industry change from our data provider without warning. As longtime followers know, we have always built our own subsectors instead of using the GICS due to usability and misplacement of certain categories in the wrong areas. Real Estate is the biggest example, we pulled REITs out of Financials and made their own sector back in 2004, many years prior to the major indexes. This time it was small changes, but enough to break the flow. With the adjustments actually getting rid of two of our subsectors, we decided to take the opportunity to split a couple of larger subsectors out and provide the best segmentation possible based on how the GICS changed. We have all the data rerouted, but labeling is still in process. I didn’t want to put off the report, so please bare with me. Below are the changes in the Subsectors (also denoted in each table):

Internet & Direct Marketing (86) to Broadline Retail
Thrifts & Mortgage Finance (86) to Asset Management
Retail changes to Specialty Retail

Most of the Thrifts & Mortgage Finance names were spread between Region Banks and Real Estate Services. The new Asset Management subsector allowed us to pull Asset Management & Custody Banks out of the Brokerage & Capital Markets and set it out on it’s own. The Brokerage & Capital Markets had an unusually large subsector and this split helps remedy that and gives better segmentation to the Financial sector overall. GICS also dropped Internet & Direct Marketing and put most of those names in Broadline retail along with department stores like $M Macy’s and $KSS Kohls. With this change, I created a Broadline Retail subsector and renamed the Retail Subsector to Specialty Retail to better fit the components left in the group. I hope to have the labeling changes done by the end of the week on the backend, but we will see how it goes. I have double checked the data, so I know it is pulling the correct information now.

The Big Picture

This week the markets took the follow through a bit more seriously with price action and the candles, but the volume just wasn’t there underpinning the move. I want to ignore it, and it might not matter in the end, but it does give me pause as we get close to new highs or at least the resistance zones right before it. So, it is price action and participation through breadth expansion vs volume. I will go with the former for now, volume has been less reliable for years.

The breadth progression is real, we are seeing the buying widening out and going into more names as new highs across all but the shortest measure are ramping. Even better, the 10 day highs have been steadily elevated, but not too big of spikes. 

The Universe Sector RS Rankings didn’t really show much movement this week with Utilities and Consumer Staples leading, which isn’t the combination that favors the bulls and new highs sooner than later. The is another caution flag to put in our evidence to weigh things out. Communication Services and Health Care were the laggards. Health Care much more so with Biotech giving up some of the previous week’s surge. Overall though, commodities and defensives are leading for now as more offensive sectors take a break and participation broadens out. I put Health Care in the offensive side of things with Biotechnology and Medical Devices being the two largest subsectors by far. The defensive nature of Pharmaceuticals and, even more so, Healthcare Services gets dwarfed by the sheer number of components in the first two. Financials really don’t fit the defensive bill either and they have been looking up lately as well. This rotation doesn’t have to be bad, it just means the traditional leaders might be on the sidelines relatively as other segments like commodities and maybe Financials get to shine for a while. It could also just as easily be corrective positioning bias and as soon as everyone accepts this correction might be over, the buying will shift back and Utilities will get deflated some relatively.

Snapshot Review

Snapshots will not be in here going forward other than maybe one to highlight for the week. I am going to the 5 day carousel for all Power Snapshots sent to members, so there is no need to repeat it here. That said, with the outage this week, I will go through them here and start a new progress. As you can see, I have starred the ones that are new for this week. Eventually, I will move them into alphabetical order with the rest.

Moving Average breadth improved on the week with more green coming in on more subsectors across longer time frame measures. We are still not in strong trend mode, but it’s building slowly.

RSI snapshot continues as more spaces move back into RSI bull ranges. Some are on the cusp with overbought CFG that need watching, but many subsectors and sectors are getting their bullish RSI positioning back in gear.

From a short-term breadth perspective, the path looks decent going into this week with Health Care being the only issue spot. More MA measures are turning green which is good, but needs to spread for broad market acceleration to happen.

Highs and lows are leaning way over the the new highs list which have spread well across the page this week giving more underpinning to the move off the lows. This was on a day with an intra-day reversal to contend with, so I would say it turned out fine.

Pressure Gauges to end the week were the only spot that showed the selling pressure much at all and here it was only in a few select spots.

Subsector Relative Strength

Now, don’t forget the change explanation up top. This is the only part of the report I needed to adjust the labeling on the table. Utilities are holding a lot of the relative strength across all the subsectors, but Financials are coming on strong as of recently. Durables and Specialty Retail are two of the movers this week worth keeping an eye on and will likely continue to strengthen only if the correction is near done.

The weekly performance leaders were a more diverse mix this week of different RS positioning. The RS Leaders still have Utilities, Financials and Industrials as the most names still holding and the RS movers section showed very little RS change over the last 5 days. The RS Movers in the bottom list shows the gainers this week are still right in the middle of the rankings after coming from the bottom portion of the list last week. Nothing really to call out as overly important from a rotation standpoint.

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. Utilities are the outright leaders and well ahead now for the quarter. Materials are hanging in there well. This list also points to Energy being a laggard for the week, especially of the equal weight $RSPE and small cap variety $PSCE. Large Cap Energy $VDE did fine. If you are in the right spaces like Materials and Financials, small caps and equal weight are actually leading their respective sectors as participation spreads out.

Wrap Up

I had a lot of changes in the Power Universe make up that distracted me and kept me from paying as close attention to the nuances as I normally do, but the markets held up very well once again. There were a few attacks during the week that buyers fought off and the $QQQ isn’t leading here, but that is okay. Other groups can lead while those that have run the most catch their breadth (pun intended). This is the rotation we are looking for. We are so close to the highs, I expect we challenge them soon. The trend is up and the time cycle is long enough now that we could push through without the need for more downside. If we don’t push through this week, I would think more sideways for a week or two while buyers get the energy built up to challenge it again. I don’t really see a big pullback type move from here without a catalyst due to the underlying strength and breadth progression we have seen off the lows.

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!