[Table Of The Week] The Best Offense Is Playing Good Defense

Steve Strazza
April 1, 2020

From the desk of Steve Strazza @Sstrazza

The market rallied almost 20% in just three days after making new lows last Monday. Stocks recently sold off in record fashion so it's no surprise to see them bounce with the same ferocity. But with the VIX still elevated above 50, we're not out of the woods yet and should expect the swift moves in each direction to continue for now.

Some say we're in a new bull market, but the charts tell us we're actually at a logical level for what appears to be no more than a bear market rally to stop and reverse.

Last week we outlined why 170 in the Nasdaq 100 ETF (QQQ) was such an important level of interest if buyers were going to take control of stocks in the near term. Now that they have, we're looking for sellers to reassert themselves at current levels, which we wrote about yesterday.

We posted some tables recently of stocks showing relative strength because we were anticipating a mean reversion move. Now that we think that move is over we want to flip those scans around and identify the weakest areas also. Here is a table of our Sector watchlist with return information from both the highs in January and the lows last week.

Click on table to enlarge view.

The table includes ETFs and Indexes from all market cap segments as well as equally-weighted. So, what are the key takeaways?

Energy is still lagging and Technology is still strong. Large-Caps are leading while Mid-Caps and Small-Caps continue to underperform.

But most importantly, defensive areas are where the outperformance is. This confirms our suspect view that the recent rally is nothing more than a dead-cat bounce and that we want to be on the sidelines for now.

You can see this at the bottom of the table as Large-Cap (XLU), Equal-Weight (RYU) and Mid-Cap Utilities and Large-Cap Real Estate (XLRE) are not only some of the most resilient sectors since January but have also been the best performers coming off last week's lows. While more offensive areas such as Industrials and Financials have performed well since March 23rd, they experienced a larger drawdown and more structural damage than the average sector since January.

With pervasive weakness from both Small-Caps and Energy, it is no surprise that Small-Cap Energy (PSCE) is the only sector currently below where it closed when stocks bottomed last week.

Looking at the table, you might think Large-Cap Technology (XLK) and Staples (XLP) haven't participated enough to the upside since last week, which is why it's important to also look at their return since most stocks peaked in January. These sectors have actually been some of the best performers. XLP tops the list with a less than -13% drawdown compared to an average of -29%.

We notice something similar when we look into Technology at the subsector level. Areas like Software (IGV), Internet (FDN) and Cloud (SKYY) have been some of the most lackluster performers off the lows but are actually the top performers since January, down only an average -15% vs -33% for the average subsector on our watchlist. It's almost as if Technology is the new low volatility.

We need to move fast, pay close attention and be nimble during volatile markets like these. What we're seeing when we look under the hood right now, particularly the defensive leadership is not encouraging for stocks as an asset class.

Some of our most reliable intermarket ratios are also flashing warning signs right now. Here's a chart of Lumber breaking to new lows.

Premium members can read our post on what this intermarket signal and others are currently telling us about the future direction of stocks.

If you enjoyed this post and want access to our premium research, start your 30-day risk-free trial or sign up for our “Free Chart of the Week” to receive more free research like this.

Allstarcharts Team

Filed Under