After doing my U.S. Sector and Sub-sector review, there is a common theme that I think is worth pointing out. Structurally speaking, things now look worse. The best sectors that had been leading are now breaking uptrend lines and key support. Meanwhile, the laggards continue to hit new lows. Things overall have worsened in my opinion.
Now, short-term we had a lot of very specific downside targets in most sectors coming into the new year. Over the past week and a half I would say that a very large majority of the S&P sectors and sub-sectors have now achieved those downside objectives. I’ve been very clear about where we want to cover tactical shorts and they are detailed in the Chartbook. Going forward we would much rather be sellers of strength, than buyers of dips, although there are a few exceptions.
Here are my notes from this week’s sector review:
Let’s start with the biggest losers of them all: Energy. All 3 of the major Energy Sectors and Sub-sectors that we follow have achieved their downside objectives. We want to be covering all tactical short positions in Energy. $XLE this week reached the $50.60 level that was the 161.8% Fibonacci extension of the August-November rally. Cover shorts. Oil Services $OIH hit 22.80 which was the 161.8% Fibonacci extension of the August-November rally as well as the 261.8% Fibonacci extension of the first half of 2014 rally. Cover shorts. Finally, the Exploration and Production names $XOP hit 22.90, which were the 2008 lows. Cover shorts. Moving forward, we want to be sellers of strength in Energy as a group, preferably towards the August and September lows.
One of the big problems I see here structurally for this market is the weakness in Financials. This week the Financial Sector $XLF hit fresh multi-year lows relative to the S&P500. This is an area where we want to see leadership, not new lows on both an absolute and relative basis. This is not good at all. Shorter-term, however, Regional Banks hit our downside target this week which were the August lows and October 2014 lows. We want to cover all tactical short positions here and look to put them back on at higher levels.
A former darling of this market was the Internet Sector. This had been a monster and the leader for a long time. Not anymore. The DJ Internet Index ETF $FDN has now broken its uptrend line from 2011 and now the 200 day moving average is rolling over. We want to be aggressive sellers of Internet stocks on any rallies, particularly towards 70 in $FDN.
Industrials have been a laggard for a long time. This has been one of the worst areas in U.S. Stocks. Although tactically our downside targets have been hit and we want to be covering short positions, bigger picture things look really bad. To me this is a text book head and shoulders top forming since 2013 and a confirmed decisive break of support near 47.50 should do it. I think we get a nice counter-trend rally in the coming weeks, maybe towards 51-52 in $XLI and it can be bought for a trade. But ultimately I do think this week’s lows break and we head a lot lower, probably under 40 back towards those early 2011 highs. We only want to be short if we are below 47.50.
On a brighter note, I think Gold miners look very interesting here. This 13 level in $GDX has been very clean support since last Summer, too clean almost. I am not sure that this week’s breakdown was the real deal, and would actually look to get long Gold Miners if we’re above 13. No reason to be long if we’re below that. I think there is a good chance of a squeeze higher and the risk is very well defined. I would be taking profits above 15.
Also in that theme is the Materials space. Our downside objectives were hit this week under 37, based on the 61.8% Fibonacci retracement of the entire 2011-2014 rally. With bullish momentum divergences on multiple timeframes, I would get long here for a mean reversion. I would only be long if we’re above 37 and would add to positions only if we are above 39.80. Ultimately I think we can see $42, but most importantly the risk is very well-defined.
I see a similar setup in Retailers. Our downside targets were hit this week near 38.40 in $XRT based on the 2014 lows. I would only be long if prices are above that and look to take profits above $42.
A lot of what I seeing out there sector by sector appears to be the makings of a counter-trend rally. But I think it’s important to keep in mind that these are “counter-trend”, within larger structural declines. Defining your goals and time horizon here is the key. Do you want to trade this bounce higher? Do you want to sit in cash and look to re-short them at higher prices? Or do you want to be extra active and do both. There is no right answer for everyone universally. It just depends on who you are and what your goals are.
Tags: $XLE $OIH $XOP $XLF $KRE $XLI $XLB $XRT $GDX $FDN $XLI $XLB