Technology Stamina Noteworthy: Given that I am headed up to Saratoga this weekend for a wedding, a horse racing analogy is in order. Technology just retook the lead heading down the stretch, over real estate after the latter briefly took the top spot last week within the major 11 S&P sectors (strength is strength no matter what group it emanates from and the thirst for yield is certainly a tailwind for the defensive XLRE). Notice discretionary making a nice push again as the XLY is the third best behaved group thus far in 2019. One should not be surprised if technology goes wire to wire this year, as it has held the top spot for the vast majority of time. Keep in mind trends tend to persist, more likely than they are to reverse. We have now written THREE consecutive technology reports, because that is where we are seeing the most opportunities. VIX Lives Up To August Hype: Volatility normally is heightened in August, and this year it lived up to those assumptions. It rose 100% between 7/25-8/5, and we used measured moves as a guideline (not a science), as they often have market participants selling potential big winners too early. But the instrument did nail a precise one to 25 from a bullish falling wedge, before a recent pullback is giving the chart the appearance of a bull flag formation. Since falling below its 200 day SMA on 2/1, it has spent the vast majority of time swimming underneath, until recently. It has CLOSED above the long term line 19 of the last 21 sessions. That moving average should be viewed as a line in the sand. Bulls may take comfort is seeing the 11 down days it has been above the 200 day since reclaiming in on 8/1, all CLOSED hard upon lows for the daily range. But once again candles and wedges give one an edge if used properly, but PRICE is omnipotent and must be respected above any other indicator. Examples: Trades will often fail, and one has to be able to admit when they are wrong. It is part of the business and cutting them quicker, rather than later if they are not working, or if a stop is taken out is crucial, no questions asked. Below is an example of how I was WRONG with the chart of APPN and how it appeared in our 8/21 Technology Note. The stock was 20 handles above its rising 50 day SMA, and one would have thought that was extended. Couple that with the fact that software was weakening somewhat and it recorded a bearish evening star pattern at the round 60 number, and the bearish thesis was gaining steam. PRICE, all that matters, had other ideas and although it is still hanging around that level, it is better to preserve your mental capital on better fish to fry.
Tug Of War Continues: Markets are certainly stuck in a tug of war here. One concern is the amount of time the benchmarks and leaders are taking to resume their uptrends. Prior selloffs/corrections were erased with rapid V shaped recoveries. That does not seem to be happening currently. Looking at the Nasdaq the more time it spends underneath its 50 day SMA, although it is still rising, is a concern too. But the bulls have some ammunition in their pocket as well. The trend is, on a very simplistic basis, often seen as higher if the index is above its 200 day SMA, and the slope of that line. Until it is definitively broken, give the bulls the benefit of the doubt. From a rhetoric standpoint I did see headlines that the S&P dividend yield is now above the 30 year Treasury yield. As it is being portrayed as a negative, I will take the other side, as there seems to be fewer and fewer places to put hard earned capital to work. It should continue to flow into equities, and more specifically domestic. Unwanted New Issue? With no lack of recent IPOs coming to the market, many market prognosticators have wondered where capital was going to come from to weather the supply. They spoke of it as a bearish development, and also new names coming public with decelerating profits. They include UBER and LYFT, and also names getting ready to beginning trading like Peloton and WeWork. I am strictly a technician so I am not to familiar with the fundamentals, but I would guess SONO, and the chart below, did not have the best financials. The charts complexion, even though it still trades 37% off most recent 52 week highs, is looking a bit better. It has taken its time rounding out its bottom and looks ready to perhaps start a nice run higher. Examples: We have an always be big proponents of CLOSING prices, and on top of that never front running an idea. It may seem like a good idea to get in a bit early to attempt to capture a bit more return, but it is a frivolous pursuit. A good example of that is that chart below of WUBA, and how it appeared in our 8/27 Technology Note. This name is mored in a strong downtrend, down more than 30% from most recent 52 week highs, and that is with todays robust advance of nearly 4%. It has carved out a bearish descending triangle pattern that has a pivot at the very round 50 number, and anyone who tried to be cute and waited patiently for PRICE confirmation paid a heavy toll. It may still breakdown, but remain on the sidelines until it breaks and CLOSES below the suggested entry.
Seasonality Headwinds? Technology overall has enjoyed a robust gain of 27% YTD (just last week it surrendered its top spot among the 11 major S&P sectors to real estate), but the chart below shows the XLK heading into what I thought was strong Q4. September, October and December finish the month higher just 50% of the time, and November has ended the month higher than it started 3 of the last 4. With the group already enjoying a strong run, will it be more susceptible to a weaker finish? No one knows the answer of course, but the fact that the Nasdaq trades just 6% off all time highs, and that is has acted well so far this year, I would expect a decent move as we approach 2020. Software Reclaiming Leadership: Competition and rivalry is healthy, as it brings out the best in life and markets. Below is the ratio chart comparing the SMH to the IGV, and it is a relationship we have been watching for some time. We were somewhat concerned that software was "softening", but that may be beginning to shift back again in favor of the IGV. On the chart here, we can see how just today the semiconductors recorded their first lower low, after FOUR consecutive higher lows. This does not mean the semiconductors are ready to pack it in, they just may not act as powerfully as software going forward. The SMH did register a bullish harami candle Monday, and some individual plays have been stepping up their game including IPHI CRUS PI and LSCC. Examples: Software stocks have been trying to maintain their leadership role, as we have discussed recently, and it will be up to the smaller pot of generals in the group to do so. Below is the chart of AVLR, and how it appeared in our 8/15 Technology Report. This particular name never undercut its rising 50 day SMA this year thus far, and it must be respected. We are big fans of gap fills and round number theory, and this one filled in a gap on 8/14 from the earnings related 8/7 session. One has to admire the THREE straight double digit gains after earnings it has recorded, and this one should be purchased on pullbacks going forward.
Amazon Not Primed: The behemoth recorded its 6th consecutive WEEKLY loss Friday, its first in the last 5 years. More importantly it CLOSED beneath its 200 day SMA, now the fourth time it has done so in 2019. The previous three all recaptured the long term moving average within days. But is the amount of times undercutting the line becoming excessive? The prevailing wisdom is the more time support is touched the stronger it becomes. I have never been a believer in that theory, and unless there is a very rapid recovery above the line once again, the stock could be in for some pain in the near term. AMZN is by far the largest component in the XLY at more than 21% of the fund, but it is also the 3rd largest holding in the Nasdaq just above 6%. Like AAPL it will have a big say in what is next for not only discretionary, but the markets themselves. Discount Bifurcation: Discount names which are often seen as defensive and can insulate a portfolio somewhat in a downturn have not behaved that way as of late. Of course WMT rose 6.1% after a well received earnings report on 8/15. But smaller cap names like FIVE OLLI and BIG have performed poorly down 23, 24 and 59% from most recent 52 week highs. Below is the ratio chart of two supertankers in the group, and it demonstrates very different paths. TGT rose almost 23% this week in the second largest volume in the last 5 years. KSS on the other hand has been nearly cut in half, without a 2:1 split (stab at humor). Rumors have been swirling for some time that AMZN may have interest in acquiring the stock, and maybe down here it is becoming more attractive. But to base an investment decision on the hopes of a takeover should never take place. Examples: Footwear names have been somewhat left behind in the overall discretionary move higher. NKE trades 11% off most recent 52 week highs, and peer UAA is now 35% off its most recent yearly peak. CROX and SKX are deep in bear market mode off 27 and 28% respectively from recent highs. Below is the chart of another laggard in the space SHOO, and how it appeared in our 8/22 Consumer Note. Breakouts and breakdowns are often tested for their validity and this name did just that, hitting the level of a symmetrical triangle, and has since turned lower. The last 3 weeks have all CLOSED extremely taut within just .13 of each other, and that type of coiling often resolves itself in explosive ways.
Concentration Builds Wealth...... When the rhetoric heats up about how just a few select names are carrying an overall soft consumer space, there is some validity to it. We hear incessant chatter about how AMZN has been crushing the brick and mortars, and how its performance really put a tailwind behind the XLY. That is correct, but that name is now 11% off its most recent yearly peak, but backing the ETF now is the action in HD. The second largest holding, has risen 28% YTD. Then SBUX, the fourth biggest component has jumped 50% in 2019. Going to be hard for the XRT to catch up when STMP, the ETF's most influential name at more than 2% has barely moved the needle even though the laggard has more than doubled since the 5/31 session lows. Creme Rises To The Top: It is often mentioned that the vast majority of a stocks performance is related to the group it is in. There is a lot of truth in that, but there is something to be said about an individual name executing a successful strategy. Below we look at the behavior in six stocks within the home improvement space, in the news on the backs of big earnings reactions this week from HD (broke above a 218.69 double bottom pivot today) and LOW. Notice the rising tide has brought RH higher, but LL PIR and TTS were never able to grab their piece of the lucrative pie. All 3 of the laggards are lower by at least 51%, and PIR is down more than 90%, not a typo, after a 1:20 reverse stock split this June. TTS is down 68% from its most recent yearly peak, AFTER todays 12% gain. Examples: Of course not all retail related plays did well today. And that should be a concern if you are a long shareholder of a name that did not perform on such a strong day for the group. Below is an example, with the chart of SFIX and how it appeared in our 8/14 Consumer Note. Thursday as the XLY enjoyed a solid session advancing nearly 2%, SFIX fell by nearly the same amount. It now trades 62% off most recent 52 week highs, and is higher just 4 days in the month of August this far. The name is on a 3 week losing streak that fell 27%, and is DOWN another 2.7% this week. Perhaps the very round 20 number will hold it at bay temporarily, but expect this name to be a teenager soon.