The debate about whether Amazon is in the Technology Sector or the Consumer Discretionary sector is really a pointless one. It isn't anyone's opinion that Amazon is in the Consumer Discretionary Sector. Amazon IS in the Consumer Discretionary sector. In fact, it represents close to 11% of the S&P Consumer Discretionary Sector Index. Amazon could double tomorrow or go to zero and it will have no impact on the Technology sector. Do you know why? Because it's not in the technology sector. It's in Consumer Disctretionaries.
Anyway, the point is that Amazon has been carrying Discretionaries because of its enormous weighting. But take a look at what the Discretionary space looks like if you take this market-cap weighting out of the equation:
The Stock Market has gone no where in 6 weeks since we originally wanted to take profits on all of the long positions we were laying out in late January and early February. During this period of no advance, we have seen a massive deterioration in market breadth with fewer stocks participating. Important sectors like Technology are breaking down hard, which is further evidence that taking profits in late March was the best course of action.
At this point, we now want to err on the short side and aggressively be positioned to take advantage of more selling to come in stocks.
Strength across the commodities complex has been a significant theme throughout 2016, but Feeder Cattle has not participated to the upside at all this year. It currently sits at near 3 year lows and is down 15% for the year, but recent price action suggests this market could be setting up for a monster squeeze to the upside.
Structurally, prices have been stuck in the 145-170 range since breaking the uptrend line from the November 2009 lows. Last week prices made new marginal lows as momentum diverged positively. If this sharp reversal back above the December lows holds until the end of the week, it would confirm that bullish divergence and failed breakdown from a structural perspective. The upside target for this potential move would be the YTD highs near 170.
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.
