[Chart Of The Week] What Did The Cyclicals Say To The Spooz?

From the desk of Steve Strazza @Sstrazza

Yesterday I wrote a post about deteriorating market internals. I discussed breadth divergences as well as the lack of confirmation of the S&P 500's recent highs from many important sectors and indexes.

In this post, we're going to focus specifically on the Large-Cap Sector SPDRs that failed to make higher highs and are showing early signs of cracking. To no surprise, these are some of the most cyclical areas of the market including Industrials (XLI), Financials (XLF), Materials (XLB), and Energy (XLE).

This speaks to the lack of risk-appetite we continue to see not only within equities but across all asset classes right now.

You can see the first three sectors in the chart below. With Crude Oil futures crashing below zero this week, we think it's prudent to stay away from the Energy sector until the smoke clears.

Click on chart to enlarge view.

Notice how all three of these sectors recently registered lower highs despite the higher highs in the S&P 500 (SPY) last week?  These same sectors also failed to confirm (ex-Industrials which made a slight new high) the higher highs made by the index in February... and we all know what happened after that.

Add these to the list of divergences we discussed in our last post. We'll need to see rotation into these areas soon or the current rally is likely to run out of fuel. Large-Cap Technology and Growth can't carry the entire market on their backs forever.

In fact, the majority of sector SPDRs did not confirm the new highs at the index level last week. Utilities (XLU) and Real Estate (XLRE) also fell short, but these risk-off sectors have fared much better than the cyclicals both ahead of the selloff as well as coming off the recent lows.

One way we are measuring relative strength right now is by the amount prices have retraced their February-March drawdowns. Strong areas such as the Nasdaq 100 (QQQ), Health Care (XLV) and Staples (XLP) have already retraced as much or more than the key 61.8% level.

Meanwhile, the weakest sectors and indexes are starting to roll-over after barely retracing 38.2% of their drawdowns.

Some examples are the Small-Cap Russell 2000 (IWM) as well as Industrials and Financials, each shown above. We wrote about this level in small-caps last week which you can read here.

Weak bounces and lower highs. These are exactly the kinds of areas we want to be looking at for opportunities on the short side right now.