Power Sector Review

May 20, 2024

We saw breakouts this week in both the large cap indexes we follow as well as our own equal weighted Power Universe. Some belief is coming back in as new highs are made, very few believed the evidence we have been seeing over the last couple of weeks. Having doubt in the first part of the rebound is understandable, but day by day the evidence kept building for the uptrend resuming.

The Big Picture

The TP Weekly chart shows the clean breakouts on higher volume for the $SPY and $QQQ as the RSI Positive Reversals hit their objectives. The RSI have more room to extend this move before getting overheated. $IWM hasn’t made a new high yet, but also hasn’t looked back much since it visited the MA bands last month. All three of these are set up to move higher based on these momentum readings.

When we move over to the Power Universe chart, we also see the breakout on Tuesday which held through Friday even with the markets softening as a whole. One the good side, it is confirming the RSI bull range and now moving into Nitrous. This doesn’t always work (like all technical signals), but we feel is a notable time to be involved and can lead to acceleration in the price action. The CFG is pausing in a divergence without breaking the 100 level on this shorter term indicator, which could be hinting at a harder retest of the breakout over the next few days. If this happens, I don’t expect it to be a game changer with the underlying breadth we have been seeing.

Utilities remain the top sector, but they are starting to lose their grip a little this week with only a 1% performance while Technology was over 3% on the week. Consumer Staples was also slow as another defensive underperformer. The worst performer was Industrials which has started to lose relative performance in recent weeks. It hasn’t been losing in absolute terms, only relative, so we will see how it acts if we get a true breakout buying in the coming weeks. The two highest performers were Technology and Communication Services which have been laggards as of late. These are offensive sectors that have a lot of growth names in them, so to see them back in leadership positions would be another piece of positive evidence. In a bullish scenario, I would continue to look for defensives to fade relatively, but still move to the upside overall. We need to see more of it and a good start would be for Utilities to get dethroned here soon.

Snapshot Highlight

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

Looking at the New Highs Snapshot, the important thing for us to point out here is the very nice progression across each of the time frames we measures. Not only has it gradually spread from the 10 day highs all the way up to 253 day high cells are now turning green, but the 10 day highs have stayed elevated without many spikes for weeks now. This is just orderly and persistent buying as opposed to a mad rush for the buy button. That kind of happened on Wednesday when the $SPY and $QQQ broke out, but it was still pretty orderly all the way through and gave very little of those breakout gains back through the end of the week. In this “one foot out the door” environment, that last part is important. The two notable sectors here are Consumer Discretionary and Health Care which both performed well this week, but as you can see haven’t been big participants in the rebound rally so far. Maybe that is changing with hints of relief on the inflation and interest rate fronts.

Subsector Relative Strength

All of the subsectors are now back labeled and routed correctly. We saw a lot of movement this week. Two of the top three came from Materials with Broadline Retail in the mix. There were quite a few subsectors gaining over 3% for the week which is a solid return no matter how you look at it. Coming on a breakout week is even better. You can see there were also quite a few RS Gainers across 6 different sectors, but Communication Services and Consumer Discretionary have multiple subsectors making the list. For some reason, I put an extra line in separating Consumer Discretionary, but looking at it now maybe it was Freudian. If we did cut off the last three, the rest of the sector would be one of the best looking among all the sectors, but in reality, Automobiles and Leisure Goods have been some of the biggest laggards all quarter. Hotels, Restaurants & Leisure aren’t as bad, but the recent stall has sent the subsectors to the bottom of this RS list.

Now breaking this out into our normal scans, we can see the weekly performers are also many of the RS gainers. Big RS moves from the 40s and 50s into the 70-90s in RS rankings this week. Software is one that stands out here with a flat return over the last quarter. Medical Equipment is actually negative over the last quarter even after being up 7% in the last month. There are plenty of spaces to drill down into that are not overbought or out of reach right here.

RS leaders are still filled with Utilities and Commodity subsectors with a few others sprinkled in. This list is seeing some fresh names from more offensive sectors while the Utilities weekly returns are among the lower ones on this scan. A shift in leadership makes sense if the breakout is to expand. The RS movers is a good place to start when looking for new fishing lanes. As I often mention, don’t rule out the RS losers as they may be coming into a nice support zone as their RS pulls back. These RS measures are 3 month, so they will react to short term pullbacks.

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 remain in the top two spots, even with mediocre returns this week. Both have standout quarterly and monthly returns. Quarterly shows more of a dramatic lead which is helping hold up the RS right now. Technology accounts for 3 of the 6 RS gainers on the list and a fourth is Communication Services. But, also check out Real Estate this week and see if it can get a bid in expectations on interest rates. 

Wrap Up

The major breakouts came in most spots this week and held, now we watch for which sectors pick up the most on any further expansion. I believe the rest that Technology, Communication Services, Health Care and most of Consumer Discretionary had are over as each of them put in very solid weeks. Energy is also starting to poke above its small bases we have seen in recent weeks after a fairly textbook corrective wave. I would keep an eye on the individual subsectors in Energy as well for more improvement. Unless the broad index breakouts all fail hard, I am not looking for significant downside. Instead, a retest of the breakout level looks more likely; and that’s only if we don’t just grind higher from here to make some space.

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!