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The Sector Report – Week Ending December 11, 2015

Week ending 12/11/2015:  views from SPX9 and ancillary observations

XLY:  (Consumer Discretionary)

XLY has become ugly quickly from a couple perspectives.  It has yet again gone sub 50ma after having made it back to the previous high ground and awaiting a new high, break out.  With this, the new high break out has completely failed yet again.

Furthermore, in the last 10 trading days (2 weeks) XLY has posted 4 stand-out if not ridiculous distribution days.  These are not just technical distribution days but rather eye-popping days.  (for clarity, these occur when price closes down on the day from the previous days close on heavier volume than that previous day.)

The above type of activity is far more troubling when we realize this is a leader within the sector structure.  That is incredibly negative for the sector but more importantly for the market overall.

To round out the negatives if you will, XLY has also pulled back into its base now for the 2nd time after having made it to the previous high ground awaiting a break out  Incredibly negative trading action!

With the above not surprising the subs have deteriorated significantly off already on-going unimpressive results.  This sector looks incredibly vulnerable.  It is crucial this finds some stability soon to where it could recollect itself, stabilize and move back to previous high ground.

Bottom line, stay clear and watch.

XLK:  (Technology)

Similar to XLY, XLK has also pulled back into the previous significant base as it was awaiting a break out to a new high. With this, and in light of the previous attempt this also now has a clear double top look to it.  XLK has remained less volatile intra-day in this process but the end result is not what we want to see from a leader placing even more concern onto the market overall.

XLK has gone sub 50ma as well and from Wednesday last week to Friday last week it put in two stand-out distribution days out of the three trading days.  Concerning trading action for sure.

On the sub front, we see deterioration here also from an already poor level overall.  Most importantly is the significant wash out of the developing and broadening strength that had been trying to build the previous couple of weeks.

To name some, computer services is on the cusp of a new low. While consumer electronics hit previous low ground and blew through it to downside.  Electrical comp. & equip. Had been building and dancing with getting north of 200 but has completely failed in an ugly manner.  Trending down now.

Electronic equip. was building and is trending down – very poor for a sub that was attempting to build strength and trend above 200.    Mobile telecom put in another low and is just trending southbound while telecom equip. is now sitting on previous low ground looking to break to new low.

The established leaders such as software has pulled back a lot but still marginally above 50.  Internet’s down some while the important semi’s have pulled down but still has constructive look.

A more detailed breakdown for XLK sub structure than normal because of its leadership status but more importantly because of how the strength throughout its subs were building and broadening out.  That is not the case any longer which is very concerning for the market overall in light of this leaders’ action both on the surface with XLK and deeper with its poor sub structure.

Stay clear and watch…..concerning!

XLF:  (Financials)

XLF is a problem both for itself and the market overall.  As stated ad nauseum of late in SPX9 the financials have been on-off with its attempt at leadership status with “fed on-fed off” views.  Underneath this is “fed-on” equals stronger economy with on-going expected rate hikes with growing interest rate spreads for the financials to capture and enhance their profitability further.  “fed-off” is polar opposite in that a deflation concern remains and the prospect of such is a financials killer if you will.

It appears it is not about fed on-fed off and longer but rather the action of the financials seems to have been hit with a fed on reality.  That is, inter-markets have not cooperated namely the bond market.  The yield curve has compressed with an ever growing consensus that it is fed-on.  To the detriment of the financials, this is/was not the expected outcome.

XLF is very week and looks ominous.  It has taken back any attempts of recent weeks to build strength and to try to get back to previous high ground.  In addition, and this seems to be a theme thus far in SPX9, there have been three stand-out distribution days in the last several.  These are downright ugly distribution days – not good!

Wowwww….asset mgr’s have been destroyed after having been building and trying to dance with 200ma – very ugly!  Banks are looking ominous – not trading as expected with fed hike(s).

Financial admin. – previous week view proved correct – this on-going leading sub has now broken down and is sub 200 – not good!  Last weeks’ sub alert and concern for this sector is unfolding.

Wowww on full line insurance. Was charging to previous high ground with building strength and has completely turned tail – trending south and sub 200 – not good.  Ditto for the insurance realm overall.

REIT’s are quite challenged overall and the “housing anything” theme via the financials has significantly deteriorated from a feeble attempt to get moving north.  An aside on this theme, within the XLY structure it was weaker but not decimated.  Enough to continue watching and waiting with a developing look of it providing short opps before it provides longs.

Overall, financials have been decimated.  XLF’s trading is ugly while the sub structure is nothing short of ugly.  H&ups are dead!  Truly a “wowww” result whereby strength was trying to build for weeks and weeks and has been beaten out in several days of trading.  Yet again why patience for true leadership usually pays dividends.

Stay clear of this sector….

XLI:   (Industrials)

XLI has broken down now sub 200.  This has not been leading nor even trying to lead but rather has been dragging higher as market has tried to get to previous high ground via the main indices.  XLI’s problems have not and do not portend good things for market overall.  Hard to see this sector be challenged and expect to see the Dow Jones trend upward.  Throw in the on-going poor performance of the Dow transports and put the three together and leaves us with a low probability market trending higher.

Delivery services has gotten crushed – on going dragging has resulted in breakdown.  Trucking, transportation services and railroad – key subs – all weak and lower.

Overall the sub structure has deteriorated significantly.  Avoid, watch and wait.  Nothing going on here on the bullish side until/when/if better set-ups show themselves.

XLB:     (Basic Materials)

XLB’s on-going “blah” trading has now broken to the downside.  Nothing to speak of has been going on within this sector and its subs now for quite some time suggesting a break in some direction would be coming.  That direction is south with a breakdown.

Dead is the operative word on the sub structure here.  Nothing to address here other than on-going weakness has gotten a bit weaker.  Containers & packaging has broken down further.

Fed rate hike(s)??  Ad nauseum here – unreal this topic of conversation has even entered the fray in the last 2-3 months!!

Stay clear and watch…

XLE:     (Energy)

XLE is on previous low ground.  Not much to comment on here other than the key question as to whether this will be able to stabilize here or if it breaks lower.  If it does break lower, could be a significant break lower in size and speed!

Subs continued to be dead.  Nothing at this time to look at – watch and wait.

XLV:      (Healthcare)

XLV remains sub 200 and has deteriorated slightly.  This is an accomplishment within the broader backdrop whereby the markets/sectors/subs have been quite challenged.  At the same time, this accomplishment is much watered down in that XLV has been unable to get north of its own 200ma let alone get even near its previous high ground.

Subs have deteriorated much more than XLV itself suggesting a SPX9 weighting set-up that has aided XLV last week.

Medical equip. And medical supplies both have now gone sub 200 again – not good for two leading subs.  In addition, the very important subs of biotech and pharma both have weakened also.  All together not good sub action for this sector.

Continue to watch and see – sector is not looking good.

XLP:    (Consumer Discretionary)

XLP has pulled back down again with the rest of the sectors/market.  It is marginally sub 50ma which if this becomes a ceiling we may be seeing another rollercoaster ride south with this “defensive” sector.

The h&ups on the sub structure experienced a tremendous downdraft.  In addition, and this is interesting, the most defensive subs within this defensive sector have held up just fine.  The two stand-outs within this theme are food retailers (I guess we will all buy food regardless seems to be the theme) along with nondurable household products.

Anything remotely cyclical within XLY (consumer staples) has taken a hit.  For example, tires – typically we will always have decent tread on our autos – unless it gets real bad then seemingly we will drive awhile and wait on that type of purchase as well (seems to be the message.)

It seems this message within staples is a key message.  That is, SPX9 does not agree with the fed’s assessment that we have a thriving economy that is begging for rate increases.

Stay clear of this sector as well – wait and see for on-going developments.

XLU:  (Utilities)

XLU is showing no signs of life.  Range bound at best.  Remains sub 200 and seemingly lifeless but is displaying some volatility nothing that suggests a break higher or lower currently.

Subs are weak and not suggesting anything strength is imminent.  The on-going strong water sub has held up nicely in light of the overall market deterioration.  More impressive is this is holding up after a significant breakout/spike upward recently.  Definitely a leading sub for this sector and one of the strongest in the market/sub structure overall.

Continue to stay clear of XLU – watch and wait.

Observation:

We now have a leaderless market when viewed through the S&P 500 and its 9 sectors.  There are still some leading subs but this fact wreaks of how weak the market structure has become in that we now have to drill down to the sub level to discuss leadership rather than identifying the number of sectors within the main indices that are leading the charge.  On a relative strength basis we can find “leadership” but that is almost always the case whenever all the sectors are going down under the fact that some go down less than others.  The important absolute measure though now has us in a leaderless set up which is quite negative set up for the stock market as a whole.

The absolute measure – is that of a vehicle reflecting its ability, at a minimum, to hold up (i.e. Not break downward) even in the face of market pressure.  The much more necessary component of absolute measure and hence gauging leadership is to see a trending vehicle whereby higher highs and higher lows are achieved – a simple uptrend.  This has escaped the sectors (and market) now for some time hence the ad nauseum commentary on this theme within SPX9 for many weeks now.

When looking deeper into the sectors, in particular the previously identified leading (or trying to lead) sectors through their subs is when we see a further breakdown in SPX9.  The h&ups for the overall structure has been quite weak with a market backdrop that was near previous highs.  Now that quite weak sub structure has cliff-dived to near historical lows.  If there is an “upside” to this reality it rests only in the thought that the SPX9 sector/subs are so low that we may see a bounce from what could be considered an oversold level.  This level currently suggests further deterioration is needed (but not much more frankly) before we would expect such a bounce.

The above reality now places us in a bear market discussion/alert.  The consensus likes to withhold such a discussion until the main indices are down past the 10% marker and to officially name it a bear market when we are near the negative 20% marker as I understand it.  These silly markers are analogous to selling flood insurance for future flooding once the flood has begun – not much help.

The significance of entering this discussion is, mentalities are reversed whereby “buy the dips” becomes “sell the strength”.  On the short side, if/when we can find some strength, it will be shorted into.  The list of negative structural market backdrops has been long and continues to get more severe.

Keeping on point to SPX9 and some ancillary markers; over the course of 2015 we seen the h&ups having gone from normal strong levels to deteriorating over months with a cliff-dive to historically low levels!  Then the expected bounce (late summer) that would answer significant questions in terms of its broad strength.

We have been experiencing that bounce and the SPX9 throughout it has been weak and unimpressive; answering the question – could that expected bounce be something to spark a new upward trending market or would it be fraught with fool’s gold.  It now appears the latter in that this bounce that we have been experiencing is just that – a bounce – and not a spark to send the markets trending higher with ever broadening strength throughout the SPX9 structure.

With this, bear market is front and center as the discussion topic for SPX9 whereas recently the weekly conclusion was double top alert and lack of any broadening strength.  For this bear market discussion to be erased, a very simple metric needs to be fulfilled by the market – that is new highs at a minimum.  In its most basic form a healthy market should be able to trend and at a very minimum, some component sectors should be able to fulfill upward trend requirements – higher highs/higher lows.

We have neither – no index trend and no component sector trend and now a defined leaderless sector backdrop.  This is deterioration on top of on-going deterioration.  When adding some ancillary market’s such as market cap performance we see the micro’s, mid’s and small’s all performing downright ugly on an absolute basis.  When looked at through relative strength to benchmark S&P 500 they post poor results.  Add to this bond market action where risk spreads elevated months ago and remain elevated.  Along with this, the high yield bond market is in crash mode with the closing of funds to investor redemptions in light of lack of market liquidity.

Adding to this, the now long on-going story of the Dow transports doing very poorly whereby it had peaked out just out of the gate of this year (2015) and now is threatening another lower low for this calendar year.  The century-plus old basic Dow Theory is screaming problems with the horrible tranports performance when measured with the Dow industrials.

More front-and-center we can expect volatility – if not insane volatility – in the week ahead.  With the h&ups where they are currently they suggest more immediate downside but close to a potential bounce.  If no bounce and they hold low points, this then suggest extreme weakness and a nasty fall being imminent.  But that is looking around too many corners so staying more to what is right in front of us this week suggests some significant volatility.

Interestingly, it would not be surprising, in light of where h&ups and other metrics are located (as in pretty stretched to the downside near-term) that by the end of Friday’s trading we conclude higher than where we began the week – even if only marginally so.  And right on cue, if this occurs, there will be a force of pundits and talking heads going on about the inherent strength of the market in light of its ability to end the week up against the fed hike, high yield market crashing, and the crazy volatility throughout.

At that point we’ll see what the structure looks like from a broader perspective.  Right now, SPX9 and the ancillary markets are suggesting we have tremendous problems and the on-going double top alert has been changed to a bear market alert.

Ken Reinhart

Director of Market Research & Portfolio Analysis

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY

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