Financials Ready to Deposit Gains for Investors? Seasonality suggests that may not be the case. However no one should base their investment thesis on this alone, and as always look for best of breed individual situations. In any group that leads or bleeds, an astute stock picker should prevail. For example in the overall banking space PYPL is now closing in on all time highs, while a name like MC still trades 44% off most recent 52 week highs. The old adage "a rising tide lifts all boats" is accurate, but the shrewd trader will identify the names that advance 50-100% or more, while the average player will be satisfied with the mediocre return. If you trade the averages, or ETFs, you get average returns. Do the homework. Russell 2000/Financial Sector Relationship: The XLF did start '19 on the right foot with a weekly gain last week of 2.8%, bettered only by energy, communications and discretionary (although it was just the eight best of 11 major S&P sectors in 2018). Perhaps a good way to gauge the potential for a positive snapback the rest of this year, would be to observe the Russell 2000. Not only is that small cap benchmark usually a good leading indicator of risk appetite, but its heaviest weighting happens to be the financials (chart below). Maybe it is not a coincidence that the financials began '19 well, as the Russell 2000 is higher YTD by 7%, compared to the Nasdaq, S&P 500 and the Dow up 5.2, 3.4 and 2.7% respectively.
Group Overview: The industrials will often give you valuable clues to the genuine health of the real economy. Of course they transport goods, which consumers have purchased, so vital information can be had by monitoring the behavior of stocks in the group. Of course we still hear the Dow Jones Industrials which are anything but as "old tech" names have been added to the index over the years like AAPL, INTC, CSCO and MSFT. Some of the "real" industrials in the index, like BA or CAT, are like the rest of the market still trying to recover their recent wounds. BA the largest name in the price weighted index is showing signs or recovering after a nearly one year long sideways pattern, and more recently has traded between the round 300 and 400 figures. On its WEEKLY RSI it could be readying itself for just its second bullish MACD crossover in one year (the last one was short lived last October). This name has the most influence on the benchmark, being the highest price, and it is the most followed index in the world. So its strength, or lack there of, will have an affect on investors appetite for risk. Airlines Readying For Hard or Soft Landing? The industrial space is very diversified, and even within the subsectors there is an assortment of names. Today we look at the airlines within the transports. To make the comparison to the overall market we look at a ratio chart of the JETS ETF to the S&P 500. Now with the abundance of ETFs, I believe there are now more ETFs than individual stock in the US, not all of them are great trading vehicles due to poor liquidity. But they do give a good overall sense of what is happening in the group. The JETS, although not a pure play on the airlines, does show the top 9 holdings as them with the top 5 being AAL UAL LUV DAL and ALK. The airlines did show solid relative performance during the turbulence in the major averages, pun intended, but they have weakened as late since the markets caught their nascent footing beginning on 12/26. The chart pattern has the look of a bear flag formation, and although I do examine strictly PRICE action, perhaps the behavior is telling us crude has a little more room to run on the upside. Examples: Continuing with the airline theme, below we take a look at a best of breed name in the field SAVE, and how it was profiled in our Industrial Report from 1/3. It is the ninth largest holding in the JETS ETF and perhaps there should be a greater weighting, as SAVE sits 9% off most recent 52 week highs. Contrast that to AAL, the biggest component in the fund at nearly 12%, that is now lower by 43% from its own most recent altitude. The softness in the JETS ETS was accelerated by the lower outlook for DAL on 1/3 which saw the stock plummet nearly 9%. Returning our attention to SAVE, it is one of the only domestic plays in an uptrend, and it has been comforted by its rising 50 day SMA since last summer, with a couple of brief exceptions that were quickly recaptured. It did successfully fill in a gap on 1/3 from the 11/26 session, and on a longer time frame if this name can get back above 60 in the near term, a level that gave it fits with resistance dating back to December '16 and May '17, it could be smooth sailing above.
Group Overview: As the New Year takes shape we like to look at seasonality trends for potential clues of what the future may hold. Are consumers feeling the heat, with a second big name issuing a warning today, of course that being Samsung?. Last week it was AAPL and is news so bad now that it is good? In the overall markets we are seeing a strong, rapid disappearance of bears as the indexes power northward. We witnessed good reactions to the, powerhouse of Europe, Germany showing soft PMI. This is classic bull market behavior as bad news is not interpreted in PRICES. We could be undergoing a huge short covering rally, or is it the beginning of a new bull? That is a distinct possibility as bear markets tend to be forceful, albeit short in duration. Getting back to seasonality a look at the chart below surprised me as retail, basically is a coin toss pertaining to the direction in the XRT. None of the first 5 months of the year the last 4 have a higher probability of CLOSING higher than where it started. This of course is on a collective basis, but search for individual leaders, we highlight many in this Report, and deploy your capital there with good risk management. Steady, Happy Relationship? Traditional relationships when comparing market components have been monitored for many years now. Some behave as they should and some do not. Remember markets tend to confound the most. One of the oldest relationships is the behavior between retail stocks and crude oil prices. The less consumers spend at the pump, the more purchasing power they have at retail locations. I am not a big believer in it, but the ratio chart below comparing the retail ETF, the XRT, the price of WTI is acting the way it should. Now one can make the argument that it is not so much that retail is thriving, but it is more the case of a plunging crude price. Either way one should always base their investment decisions on the individual chart alone. The XRT is now 17% off most recent 52 week highs, and curiously the 3 largest holdings in the fund, LAD GME and PRTY, are firmly in bear market mode. The remainder of the week should be fun to watch with this particular relationship as crude is now retesting the bear flag breakdown that aligned with the very round 50 number we spoke about in Tuesdays Energy Report. Examples: Keeping an eye on recent IPOs could prove profitable for investors. They are often overlooked which could provide opportunities. One has to deal with lock up selling after that period ends, and it is not uncommon for new issues, to traded in a wide and loose fashion, hallmark bearish traits. Below is the chart of EB and how it appeared in our Consumer Report for 1/2. The suggested pivot to be frank is UNDERWATER, but the buy stop has not been hit just yet. Notice how the round 40 number came into play with a reversal there just after coming public on 9/26. It is still lingering just below a bullish ascending triangle, which are expected to break to the upside. Today it traded in a very wide fashion to as top to bottom was a 10% daily range, and it did not join in the markets eBULLience which could be a tell going forward. Both EB and peer RST are down roughly one quarter from their most recent 52 week highs.
Group Overview: The energy group overall has been hot and cold to put it mildly. Below on this yearly major S&P sector chart one can see it is either near the top or bottom of the leaderboard. Four of the last five years has either been the best or worst, with the exception being 2017 with a slim 30 basis point advantage over the moribund telecom space. Can one incorporate a "Dogs of the Dow" strategy with energy in 2019? I doubt it as there have been just 2 top 4 finishes in the last 12 years. The XLE happens to be bouncing, as a rising tide lifts nearly all sectors, but it is approaching a retest of a bear flag breakdown near the 64 level. It never quite achieved its measured move to the round 50 number, but things never really work to precision. The XOP is a better reflection on the sector as it is much better diversified and that was rejected at the round 30 number today. Both ETFs will have to conquer downward sloping 50 day SMAs if they are to show a meaningful attempt at a trend change. Trade accordingly. Crude Bounce Closure? The mean reversion between natural gas and crude oil prices rages on. WTI came within less than 1% of the round 50 number, which remember is a retest of the very round 50 number, which aligned with a bear flag breakdown at the very same figure. Natural Gas has retreated in spectacular fashion as it now trades below a 3 handle, where it was nearly a FIVE handle in mid November. That 50 level is important as it represents a throwback into a bear flag breakdown on 12/18. Monday it recorded an inverted hammer candle. Dispirited oil prices could be looked at verifying whichever bias slant you maintain. A bear would say the heavy price of crude represents a poor economy. But the value of crude can be beneficial in different ways. Obviously it helps when consumers fill up at the pump, but it can also be observed as a national security issue. The more we pump, the lower the price, and the less petrodollars are received by corrupt terrorist organizations. However as I always say just follow PRICE action as this is all we are payed on. Examples: The round number theory is one that I incorporate into my research as long time followers know. There are some that have more relevance than others, like the par figure. Or trading through the 90 figure for the first time, as the vast majority of stocks that do will travel to 100 and beyond. Below is an example of the round 10 number that also can be influential, and here it pertains to the energy laggard GPOR and how it appeared in our 12/13 Energy Report (have not written an energy report for 3 weeks since I did not find many investable opportunities on the long or short side). On the chart below one can see how 10 which as warm support in September and October became resistance in November and December. The name is still 45% off most recent 52 week highs despite a 9% combined the last couple weeks. Most likely this dead cat bounce will take its course and the downtrend should resume at its downward sloping 50 day SMA near 8.50.
Group Overview: There was certainly a lot of excitement in the space this week, with the big news obviously the CELG news being acquired by BMY. When these type of transactions take place there is often a frenzy like feeling in the group (TSRO fetched a nice premium in December). I would say overall to curb the enthusiasm, and take a stock by stock view. After all during a wild week on Wall Street, the XLV rose just .8%, just the eight best showing among the major S&P sectors. JNJ remains a weight on the ETF as the fund rose fractionally this week and has now finished very taut the last 3 weeks, all CLOSING within just of .82 each other (JNJ narrowly avoided its first 5 week losing streak since last summer in the process). That all being said below is a seasonality view of the XLV, and although the next 3 months tend to be mediocre, but those with a longer term view may be starting to assemble a nice portfolio with the April-July periods showing solid demeanor. Biotech Battleground: Now of course this group is very diverse, and this week should be news aplenty with the JPM healthcare conference beginning Monday in San Francisco. The IBB is demonstrating some decent relative strength the last couple weeks as it was higher by 4.4 and 8.1% compared to the XLV rising 3.1 and .8% respectively the weeks ending 12/28 and 1/4. This is an extremely short time frame (IBB is still 17% off most recent 52 week highs and the XLV sits 11% off its), but one to keep an eye on. Below is the chart of the IBB and it is higher 6 of the last 7 sessions, and Friday disregarded an ominous filled in black candlestick from the day before. The ETF is retesting both a bearish descending triangle breakdown and its downward sloping 50 day SMA. Will it be too much to overcome? Only time will tell, but that is a daunting cluster of evidence. I did find it interesting that the "old four horseman" are currently the 4 largest components in the ETF, with all representing more than 8%. The more things change, the more they remain the same. Examples: Amid all the volatile trade in the last quarter of 2018, especially last December, it would be wise to search for names that traded in a relatively stable fashion. This type of behavior could be viewed as institutions taking a stand and accumulating a position. An example of this may be seen in the chart below of CTMX and how it was profiled in our Healthcare Report on 12/31. This name did experience a hefty move doubling the weeks ending between 8/25/17-3/9/18 (that run ended with an impressive 10 week winning streak that rose 50%), but since that top cratered and now sits 55% off most recent 52 week highs. To be frank I am completely a PRICE action player, but I thought it was odd that there has been basically no news on this stock as it rounds out a potential bottom. It is higher 5 of the last 6 weeks, and this week showed good follow through advancing 5.7% after the prior week jumped 11.7% (next week will be looking for just its second 3 week winning streak in the last 11 months). This name should be treated as speculation, and its charts complexion is starting off 2019 on the right foot.