Power Sector Review

May 6, 2024

The Big Picture

Another seesaw week as sellers tried to reverse the bounce on Tuesday, but lost the fight sometime on Wednesday. The small guys were carrying the weight until we saw the big gap up on $AAPL Friday. Even with that rebound, the $IWM small caps led for the week. You can check out the Weekly Macro Review for a more detailed look of the big picture through the lens of technical analysis and relative strength. We are still in an RSI bear range and coming up into underside resistance here soon, so we should see the buyers’ commitment get tested pretty soon.

I added the Highs and Lows percentages here to get the word out we have added 52 week (253 day) highs to all of these charts so we can keep up with the longer term participation visually, which always makes it a little easier to digest and get context. Above, we can see this pullback isn’t acting a lot like the last one giving it greater potential to be shorter and shallower than the last one. Theory of alternation may be at work here.

The jockeying we saw this week showed up a little in this list, but really comes out once we get down to the subsector level. In contrary to the positives under the hood that we have been talking about, Utilities in the lead doesn’t exactly jive with a quick end to the consolidation. The big winner was Health Care with Biotechnology running away with the week. This had a lot to do with $TLT firming up and some potential good news for rate cuts this year; unfortunately, at the expense of jobs. Using jobs and peoples’ lives as an economic lever to pull just won’t ever seem like the right path to me, but it is the FEDs mantra. I digress. This news helped Biotechnology plenty, but also put a wind at the back of smaller to midsize Banking which finally is getting some love and helping move Financials up the RS list while commodities take a break. Seems like a lot of rotation which is the engine of strong markets over time.

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 Weekend Power Snapshots covers the entire week in a unique way. 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.

A second week higher was good to see off the lows, but there was a battle in the middle that shows up in the big tails on the weekly candles. To end the week though, markets looked like not much happened and they were still on the search for overhead resistance to the current push. This looks great from a short term high’s perspective, but we need it to bleed into the MA section in more spaces.

Moving Average Breadth is neutral, but improving since the lows on Tuesday. The Weekend Power Snapshots is great at showing the progression.

The week closed with a lot of new highs. It came to end a challenging week which bodes well for follow through. We need some momentum as we head into resistance for a chance to get through. Probably won’t be a straight line, but if this progress keeps building underneath this week, it will be much more likely for us to get through without a major rejection.  The new lows are back to dormant fairly quickly. I would expect more random spots of weakness, even on strong days, if we were taking a longer and deeper road to the end of this correction. Instead, it feels like the slow grind higher is trying to get back in the driver’s seat.

Pressure Gauges also caught the buying in the forgotten Financials subsectors. There was buying in other spots, but that stands out to us as those two in Financials have been laggards for a while and can be very interest rate sensitive. Those two and Biotechnology have us wondering if the interest rate narrative might be about ready for a change now that everyone has become convinced rates weren’t coming down anytime soon. We shall see.

Subsector Relative Strength

The subsector world had a lot more excitement this week than the sector world and a strong rotation is afoot. I highlighted some of the biggest movers up and down in both price and RS on the full list, but the filtering at the bottom gives a better depiction of just how much change there really was under the hood.

Weekly outperformers was a long list even with me cutting it off at 2%, a bit above the top performing $IWM. But it wasn’t many of the recent performers we are used to, unless extremely recent like Utilities. Health Care has been coming back online the last couple of weeks after being one of the first to pullback with Communication Services. The ladders subsectors were all outperformers this week as well. Those that corrected first are finding buyers here early and that makes some sense. Regional Banks and Thrifts & Mortgage Finance have been heavily out of favor since inflation and commodities started to kick back up early in the year, even before many believed inflation could flare for a bit. Those two subsectors have remained depressed with Biotechnology during the entire narrative. The fact that they are getting attention and flow suggests the “higher for longer” mantra is getting a bit stretched here from the buyer’s point of view. This is also a net positive for the markets as a whole if it continues along with the bond rebound. I noted those two on the RS leader and RS Movers board still have quarterly returns just barely above zero, so they have a lot of room to catch up if they want to.

Wrap Up

We are stuck in the middle right now with the markets rebounding from the recent pullback. Information is being gathered and it leans positive right now for continuation, but it is not definitive by any means. Both sides have a good argument here for resumption of the trend of more corrective action. I would like another week or two of sideways to fill out the time cycle, but that doesn’t have to happen if we are in the early stages of a larger bull trend which is still the base scenario we are working off. Nothing in this pullback has been consequential to change that view in anyway, so we just wait for clues and opportunities to present themselves while we wait. Offensive spaces will likely come back soon, and commodities may or may not stay strong with growth. Defensive or value sectors and subsectors that have been shining very recently are the ones I am most concerned about once this plays out, but only from a relative basis. If a new leg higher starts sometime this month, I expect it to lift most all boats, but that still doesn’t mean Utilities is where we want to hang our flag during such an ascent.

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As always, I hope this helps!