As we all know, the S&P500 is a cap-weighted index. In other words, the largest companies by market capitalization (AAPL, XOM ,MSFT, FB etc) represent the largest percentage weighting in the index. The bigger the company, the more important it is to the index. There are 10 (9?) sectors in the S&P500, and Technology is by far the largest one. Therefore one can argue it is the most important one. We can make an argument that Financials are America's most important sector, but for the purposes of this conversation, let's agree on the fact that Tech is the largest and therefore the most important of the bunch, representing around 20% of the entire index.
Today we are looking at the S&P Technology Sector ETF relative to the S&P500. When this chart is going up, Tech is outperforming S&Ps. When this chart is falling, S&Ps are outperforming Tech. Take a look at this chart. Technology is literally crashing vs S&Ps:
There has been a lot of talk about how the recent rally has been accompanied by a dramatic improvement in market breadth, so I took the time to see if the data I track supported that conclusion.
The first study on the major S&P 500 sectors and US Indices was completed by calculating how far the indexes were from their 52-week high compared to the average component in the index.
Contrary to popular belief, we're not here to be right. We're only here to make money. As market participants, we're not journalists or economists or side analysts. It's their job to be "right". So when they're wrong, they like to call it a "revision". But when we're wrong, it's called "a loss". See the difference? So since we actually put money to work and take real risk, we need to be responsible with how much risk we take. Therefore, we need to make sure that the potential reward far exceeds the amount of risk being taken at a given time.
Today we're looking at a good example of this favorable risk/reward scenario in a sector that I think gets crushed going forward:
Every 2 weeks I sit down with the good folks at Benzinga to chat about the markets on their morning radio show. Today we went over why I still think a more neutral to bearish stance is best tactically in U.S. Stocks. We also talk about this rally in Japanese Yen means to the Stock Market. This Yen strength combined with the deterioration in market breadth over the past month, there is a lot more to be negative about than positive. Stocks are not where we've wanted to be in April, and staying away has worked out well. The place to have been is in Commodities. I think this theme is here to stay.
On Thursday May 5th I will be joining the rest of the San Francisco Trading and Investing community for an evening of charting and margaritas. The event starts at 6:30PM and will go on until around 8:30PM. I will first spend some time going over my process and how I approach the marketplace. Then I'll get into some of the more important themes going on right now both globally and in U.S. stocks. As usual, I will also incorporate intermarket analysis, discussing the current environment in metals like gold and silver, Crude Oil, Natural Gas and most importantly, the recent breakouts in Agricultural commodities.
This event is free for everyone to attend. Here are the details:
The semiconductor index has likely caused both longs and shorts a bit of angst over the past several weeks as it failed to make any directional progress near the top of its 10-month range of 560 to 680. Analyzed on its own the index is providing little conviction for the bulls or the bears, but a look at the individual components may provide some clues regarding the next directional move in semiconductors as a group.
The daily chart provides a tactical look at the 560-680 range that prices have been trading in for roughly 10 months now. Whether this range will resolve to the upside or downside is unclear, but the presence of a flat 200 day moving average, a bearish momentum divergence, and prices consolidating in the direction of the underlying trend may all be early warning signs of a move lower in the short-term.
With the deterioration in market breadth throughout the entire month of April and bearish momentum divergences showing up in some of the most important stocks, sectors and countries in the world, I think some exposure on the short side here is warranted.
Today we're going over my favorite short of all the Dow 30 Components.
The only thing that pays us in this market is price. That's it. So what we try and do is use a handful of supplemental indicators to help us identify when a change in trend is about to occur. One of the more helpful tools we have to achieve this is momentum. We start to see momentum readings diverge from price, before price ultimately peaks in the coming days, weeks, or months; depending on the timeframe in question.
I personally choose a 14-period relative strength index (RSI) to gauge momentum across asset classes. You can read more about how I use RSI here. In this particular case, I want to focus on the obnoxious amount of bearish momentum divergences that we're seeing in many of the most important indexes, sectors and stocks around the world. These "divergences" occur when prices make new highs, but momentum simultaneously makes a lower high. It's a sign that a change in trend is approaching. Since we take a weight-of-the-evidence approach to markets, it's not just that we're seeing one or two of these sprinkled around. They're showing up all over the place.
Throughout 2016 the weight of the evidence has been building in favor of broad-based commodity strength and now Silver is joining the party with a massive structural breakout on both an absolute and relative basis.
Structurally Silver has been in a downtrend since 2011, but met our downside price targets near 14 over a year ago and has since been building a rounding bottom. Last week, prices broke and closed above the downtrend line from the 2011 highs to confirm the bullish momentum divergence and are following through to the upside this week.
We had a nice run in the U.S. stock market throughout February and March. We obviously couldn't be happier to have seen that as we turned bullish just as the rally was getting started. However, this month, while most of the major U.S. Indexes made new highs, the breadth has weakened. We are seeing fewer and fewer stocks and sectors participating and I think the deterioration in breadth is the beginning of more broad selling to come.
Today there is one stock I think we need to mention as an aggressive shorting opportunity:
