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Four Sector ETFs That Will Profit In The Months Ahead

Posted by on Feb 18, 2017

Four Sector ETFs That Will Profit In The Months Ahead

The further turmoil in the Trump administration and growing controversy in Washington did not stop the stock market from moving even higher last week.  The surge in stock prices over the past two weeks surprisingly has not been accompanied by an increase in the bullishness of the individual investor.

According to AAII the bullish % dropped 2.7% to 33.1% while the bearish % rose 4.7% to 32.4%. if the bearish % rises again this week it would be even more surprising. It seems like the horde of bearish analysts that were bombarding my inbox in January have moved to the sidelines.

The stock market strength is causing some pain as the Catalyst Hedged Futures Strategy Fund lost $600 million or 15% in just five days as reported by the Wall Street Journal. The loss was tied to an option strategy that benefits from a stable market. The bearish part of this strategy moved further under water as the market again pushed to the upside and the decision was made to limit the losses.  According to Morningstar the fund has done 2% better per year than the S&P over the past nine years.

After closing at a new record for six days in a row the Dow Industrials sagged early Friday but rallied late to again close higher. The rally over the past week was confirmed by the technical studies as discussed in the Market Warp section but though the market internals were positive they were not that impressive.

What was impressive was the economic data as it indicates that the economy continues to improve. One portfolio manager on the credit side commented that “the real risk… is that the economy runs too hot.” Those who have been pessimistic on the economy for the past few years must be shaking their heads in disbelief.

Typically January is not one of the best months as since 1950 the S&P 500 has averaged a gain of 0.79% so last month’s 1.79% gain was the best since the 5% gain in 2013. Of course 2013 was the best year of the bull market as the Spyder Trust (SPY) gained 32.3%.

This banner year was preceded by a strong move in the NYSE A/D line in December 2012 as it moved to a new all time high on December 12th (point 1) though the NYSE Composite was still 1.5% below its high. The A/D line made another new high before stocks plunged into yearend over fears of the impasse over the “fiscal cliff”.  The analysis of the A/D had me recommending before the drop that investors   “Stuff Those Stockings with Stocks”.

The long-term performance of the S&P 500 in February shows a loss of 0.05% with the S&P up 38 years and down 29 years. In 2013 the S&P 500 was up 1.1% and is currently up 2.9% but of course the month is not over.

When it comes to the Spyder Sector ETFs two of the best months are March and April as this chart from CXO Advisory indicates. Their analysis reveals that the energy (XLE) , financial (XLF), materials (XLB)  and consumer discretionary (XLY) have gained between 5-6% in March and April. Let’s look at each of these sectors and their related markets.

Crude oil, using data going back to the early 1980’s has a seasonal tendency to form a double bottom  in early February, line 1, and then stay strong until July (line 2). Crude oil has traded in a range lately  after overcoming important resistance, line b, in December.  The breakout has next upside targets in the $60-$62 area.

Since peaking in December the Energy Sector Select (XLE) it has declined for the nine weeks in a row as it has lost almost 8%. In contrast crude oil is pretty much unchanged so far in 2017. XLE typically bottoms on January 22nd, line 1 and then forms an initial top in late April, line 2. A secondary high or double top is then formed in early June. The weekly relative performance and OBV for XLE needs a strong close in the next few weeks to move back into positive territory.

For the financial sector I prefer the Vanguard Financial ETF (VFH) which as 400 holdings as compared to 63 in XLF. On the chart I have included the recent buy and sells for investors from the Viper ETF Report.  as longs were recommended in late October. A 16% profit was taken in early December and new longs were recommended in the latter part of January.

The seasonal tendency is for an initial bottom in the middle of November (line 1) and then a secondary bottom at the start of March, line 2. It typically peaks at the end of April.  The comments on rates from Fed Chair Janet Yellen last week have pushed VFH sharply higher. The weekly technical readings for VFH look strong.

The Materials Sector Select (XLB) made its recent low on October 14th which was right on target with the seasonal pattern.  After an interim peak in early January XLB again moves higher and typically tops in early May. It has not made new highs recently but still is in a positive intermediate term trend.

The Consumer Discretionary Sector (XLY) broke out above the 2015-2016 highs, line a, in early December which had initial upside targets in the $90 area.  The seasonal tendency is for XLY to bottom in the middle of October (line 1) and then tops at the end of April, line 2. The 20-week EMA was tested after the breakout and has turned up more sharply. Viper ETF clients are also long XLY, as they are XLB and XLE.

The Economy

The Consumer Price Index came in at 0.6% double the consensus estimate as it has broken out of a three-year range. The Retail Sales were also strong as they came in at 0.4% while the economists were expecting just 0.1%.

The Empire State Manufacturing Survey came in at a strong 18.7 well above the consensus of 7.5. Then on Thursday the Philadelphia Fed Survey surged to 43.3 almost double last month’s reading of 23.6. I have been discussing the improvement in this survey since it broke the downtrend last fall and it continues to look very strong. This bodes well for the months ahead.

On Tuesday we have the PMI Manufacturing Index followed on Wednesday by the Existing Home Sales and FOMC minutes. There is more on manufacturing Thursday with the Chicago Fed National Activity Index and then the PMI Services Index.  To end the week we have New Home Sales and Consumer Sentiment on Friday.

On Saturday morning I will be writing the Market Warp section of the Week Ahead and I will be updating the analysis of the weekly/daily A/D lines on the Spyder Trust (SPY), PowerShares QQQ Trust (QQQ) and iShares Russell 2000 (IWM as well as the financial ETFs.

The Market Wrap section will be released by 2PM NY Time on Saturday. Check here on Forbes to get my full analysis and I will tell you what markets to watch in the week ahead.

 

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The Week Ahead: The Charts Won’t Lead You Astray Like P/E Ratios

Posted by on Feb 11, 2017

The Week Ahead:  The Charts Won’t Lead You Astray Like P/E Ratios

Last week’s strong stock performance and bullish market internals were consistent with the resumption of the post-election rally. The stock market’s narrow range and the failure to exceed the January highs had put many investors as well as traders on the sidelines.

In fact bulls have been hard to find as even the new Dow high at the end of January was not enough to turn many bullish.  This decline in the bullishness was evident from the AAI survey as the bullish % dropped from 46.2% on January 5th to 31.6% on January 26th.

In last week’s “Is Bullish Sentiment Now Low Enough?”  the focus was on how the advance/decline lines overall were giving a much more bullish outlook for the markets.  The NYSE, S&P 500 and Nasdaq 100 A/D lines all made new highs on Thursday which confirmed the price action.

Despite the new highs the focus of many is on why the market cannot possible go much higher. Articles frequently focus on how high the P/E ratios are from a historic standpoint which is used to argue that stocks are not cheap and that investors should not buy.

In January’s article “Wait For Signs Of A Trump Bear Market” I urged investors to wait for signs of a Trump bear market before paying too much attention to any fundamental argument as to  why stocks were topping out.  A correction of 5-10% is always possible but over the past thirty years the majority have been signaled in advance by advance warnings from the A/D lines. There are no such warnings at this time.

So what is an investor to buy so that the risk is manageable?

In November I pointed out that the monthly chart of the small cap iShares Russell 2000 (IWM) had completed a trading range, lines a and b, that went back to 2013. At the time many were also complaining about too high P/E ratios. Using the width of the formation the upside targets are in the $148-$150 area.  The Russell 2000 A/D line had completed its trading range (lines c and d) in July as it was leading prices higher.

The initial yearly pivot resistance for the IWM is at $151. Based on the January close a rally to $150 would be a gain of 11%. The underlying Russell 2000 has not made a new high yet but based on last week’s action it could this week.

The Spyder Trust (SPY) has initial yearly pivot resistance at $241.28 while PowerShares QQQ Trust (QQQ) has next yearly resistance at $128.73. Viper ETF investors and traders are long IWM, SPY and QQQ  as well as the Vanguard Small Cap Growth ETF (VBK).

How about individual stocks?

The decline in bullish sentiment was accompanied by a decline in the % of S&P 500 stocks above their 50 day MA. In early January the 5-day MA of this % peaked above 74% but has since declined almost to the mean at 55.2%.  It is well below extreme levels in the 80-90% area. The downtrend in the 5-day MA, line a, was broken in November which was a positive sign.

In recommending stocks for the Viper Hot Stocks report I do a weekly and monthly scan of over 150 stocks.  As part of the selection process I carefully examine the long term charts of the stocks that turn up in my scans. One such stocks in Mylan Inc. (MYL) which has been suffering from the negative press because of their sharp increase in EpiPen prices.

The monthly chart shows that MYL came close in both November and December to the 61.8% Fibonacci support at $32.76 that was calculated from the 2008 low of $5.75. The high in 2015 was $76.68 as it reached the monthly starc+ band. The stock is now about 50% below its 2015 high.

A monthly doji was formed in November so a February close above $40.50 will trigger a doji buy signal.  The declining 20-month EMA is at $43.92. The monthly relative performance (RS) is still in a clear downtrend and is well below its WMA. The OBV is stronger as it has bounced from major support at line b. It could move back above its WMA in the next month or two.

Of course just because a stock has been weak for the past year or more is not a reason to buy. A look at the weekly RS shows that it could move above its WMA this week and the OBV is already positive.  Though Viper Hot Stock traders are not currently in MYL they are long Vantiv (VNTV). Positive relative performance and volume are consistent with a bottom formation.

When a stock breaks out of a thirty week flag formation, lines a and b, as was the case for VNTV in early January it can create a good risk/reward opportunity. The formation has upside targets in the $66 area and on the breakout initial stops could be placed under the late December low of $58.90 (see arrow).  The breakout level was tested last week but VNTV then closed strong. The weekly RS and OBV analysis have been positive since late last year.

One of the best sites (Four Go-To Investment Research Sites) that I have found for looking at a large number of charts is Finviz.com. It gives you the capability to look at all stocks in a industry group and then switch from daily, to weekly or monthly on an individual stock. On their free site you can also scan for chart formations, unusual volume as well as a host of fundamental criteria.

Whether you are planning to buy a stock or ETF I always encourage all to do their own research and to concentrate on the risk not the potential reward. If you do this and use the starc bands it will help keep you from buying too high.

The Economy

Friday’s mid-month Consumer Sentiment survey came in at 95.7 which is down a bit from last month’s reading at 98.5. Still it is a strong number which is a plus for 2017.

This week the calendar is much more crowded as Wednesday we have the Consumer Price Index, Retail Sales, Empire State Manufacturing Survey, Industrial Production, Business Inventories and the Housing Market Index.

On Thursday we have Jobless Claims, Housing Starts, the Philadelphia Fed Business Outlook Survey and then Leading Indicators on Friday.

Interest Rates & Commodities

The yield on the 10 Year T-Note traded in a wide range last week as after closing the prior week at 2.491% they dropped to a low of 2.325% on Wednesday. The yields rose the last two days of the week to close at 2.409%.

The daily yield chart still shows a flag formation but a move above 2.555% is needed for an upside breakout. A daily close below the 2.30% level would violate support going back to November and would suggest a drop towards the yearly pivot support at 2.220%.

The April crude oil contract rallied sharply from Wednesday’s low at $51.86 on news that the OPEC measures to reduce production are actually working. Crude sill closed the week a bit lower so this week’s close will be important.

The Comex gold futures have rallied $100 from the mid December lows and have retraced 50% of the decline from the July highs.  The former support, line a, is now important resistance. It is in the 1284 area along with the weekly starc+ band and the 61.8% resistance level.

The weekly OBV is above its WMA but still below the downtrend, line b. The HPI is back above the zero line and its WMA. The daily indicators are not impressive and they do suggest a failing rally.

Market Wrap

It was a bullish week for stocks after a lackluster start as they accelerated to the upside on the last two days of the week.  The Dow Industrials were up 1% while the Transports gained 1.6% for the week. The S&P 500 was up 0.80% as was the Russell 2000 but the Nasdaq 100 gained over 1.3%.

Though there have been some downside surprises in earnings it has been the good quarter as I was expecting late last year. According to Thomson Reuters quarterly earnings may grow by 8.4%  in the 4th quarter which validates the higher stock prices.

Consumer Goods were up 1.5% with consumer services gaining 1.4% while technology and industrials sectors were both up over 1%. Even though banks stocks rallied late in the week the financial stocks were up just 0.44%.

The Spyder Trust (SPY) closed above the upper boundary (line a) of the rising wedge formation which is a bullish sign. There is monthly pivot resistance at $232.87 with the weekly starc+ band at $236.30. The 20-day EMA at $228.82 was tested Wednesday before prices turned sharply higher.

The S&P 500 advance/decline line also broke through its resistance, line c and confirmed the price action. The weekly A/D line (not shown) also made new all time highs last week. The daily OBV has also risen sharply and is clearly positive as is the weekly OBV.

The close last week in the PowerShares QQQ Trust (QQQ) was impressive.  The daily starc+ band is now at $128.13. The trend line resistance, line a, along with the weekly starc+ band and monthly pivot resistance are in the $130-$131 area.

The weekly Nasdaq 100 A/D line broke out to the upside in early January (see arrow) and has since accelerated to the upside in impressive fashion. The A/D line is well above its rising WMA as is the daily A/D line which has also made new highs.

The iShares Russell 2000 (IWM) closed above its downtrend, line a, on Friday. Though it is still below the December high at $138.25 it should complete the continuation pattern that we have been watching for the past month. This supports my view that it was a continuation pattern not a top that was forming.

The Russell 2000 A/D line closed the week back above its WMA but is still slightly below the downtrend, line c. The weekly A/D line is positive and is holding well above its WMA.  The next upside targets are in the $143-$144 area but once the small caps start moving they could go even higher.

What to do?  The strong close last week favors more gains this month. The completion of the daily flag formation in the S&P futures has upside targets at 2330 and then 2340.  The recent buying in the small cap stocks indicates that they could start leading on the upside.

Many fundamental analysts and media traders have been cautious on the market since the start of the year while my A/D line analysis has kept me bullish.  The basis of this analysis was reviewed again last week.

Back in April I suggested that “those who were not invested should consider a dollar cost averaging program where six equal investments were made over a period of time. Those non-active investors should consider a broadly diversified ETF like the Vanguard Total Stock Market ETF (VIT) or the Vanguard MSCI Europe (VGK).”

I would not be chasing the technology stocks at this time as Viper ETF investors and traders are long QQQ and XLK from much lower levels. For new longs the small cap stocks look the best though longs in both IWM and the Vanguard Small Growth (VBK) were previously recommended. It will take several more days of strong market internals before the Russell 2000 A/D line starts to trend higher and confirms much higher prices.

I do expect to see a 5% or more correction sometime this spring but is may have to wait until April as some investors try to get a jump on the sell in May phenomenon. There should be plenty of warning before such a correction. There are still some sector ETFs that look attractive for new buying.

As I noted previously there are a number of stocks that are just starting to outperform the S&P 500 and our Viper Hot Stock long positions like PCAR , TSO and EA performed well last week. Electronic Arts (EA) was up 3.5% on Friday.

If you would like specific buy and sell advice you might consider my Viper ETF Report or the Viper Hot Stocks Report .  New subscribers receive five recent Trading Lessons can help you become better investors and traders.  The 4-5 page ETF and Stock reports are sent out twice a week and each report is only $34.95 each per month. Subscriptions can be cancelled on line at any time.

 

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Charts Talk: Is Bullish Sentiment Now Low Enough?

Posted by on Feb 7, 2017

Charts Talk: Is Bullish Sentiment Now Low Enough?

The inability of the S&P 500 to surpass the late January highs and the tight trading ranges has caused an increase in bearishness among investors and traders.  The White House induced volatility has also not helped.

The change in outlook has been confirmed by the sentiment data from the American Association of Individual Investors as 46.2% were bullish the week of January 5th.  Three weeks later on January 26th the bullish % had fallen to 31.6% and it was at 32.8% last week.  This is a decline of 29% in the bullish % from the Trump rally highs.

The increased skepticism is also reflected by the increase in bearish commentary in the financial blogs and on the TV financial stations. The fundamentalist analyst has any number of measures to use that convinces them that stocks are too expensive.  A little research however will reveal that many of these analysts have been saying the same thing for many years.  They will eventually be right.

Some are warning that the market is looking as vulnerable now as it did during the summer of 2015 and in early 2106. The analysis of the number of stocks advancing versus those that are declining tells a different story. In a strong market more stocks are advancing then declining so the cumulative advance/decline line is rising.

As a market is topping, as it was in the summer of 2015, the advance/decline line will be making lower highs even though prices are still making higher highs.  In early July of 2015 the divergence was becoming more pronounced but stocks did not start to plunge until August.

The weekly chart of the Spyder Trust (SPY) shows that as it was making a new high the week of July 24, 2015 the S&P 500 A/D line was much lower (line 1). It was also below its declining WMA and five weeks later the stocks plunge culminated on August 24th.

  • As the Spyder Trust rebounded in the fall of 2015 the weekly A/D line made lower highs (line b) as it was weaker than prices. By the end of the year the A/D line had made even lower highs,
  • At the market low in February 2016 both the weekly and daily A/D lines formed higher lows. These bullish divergences along with low bullish sentiment and other bullish technical signs suggested a bottom was being formed. (Is There Blood In The Streets Yet?)
  • Since then the weekly A/D line has stayed above its WMA except for five weeks ahead of the election. It moved back above its WMA the week of November 11th.
  • The A/D line has continued to make new highs, line c, which is consistent with a strong market.

The daily A/D lines turn positive or negative ahead of the weekly analysis and in December the Nasdaq 100 A/D line broke its downtrend, line b.

  • Then on December 27th the A/D line made a new all time high (point 1) which signaled that is was going to be a market leader. It was the favorite pick for Viper ETF clients and is up 6.2% YTD.
  • The sharp drop in the A/D line at the end of the year held well above the prior low, forming the basis for the current uptrend, line c.
  • The Nasdaq 100 A/D line has continued to make higher highs in January and early February. It shows no signs yet of topping out.

Summary:  The Spyder Trust (SPY) completed its flag formation on January 25th which was supported by  a new high in the S&P 500 A/D line. The small cap Russell (IWM) is still in its trading range and it needs a close above $138.25 to signal that its uptrend has resumed.

This A/D line analysis is typical of the content of the trading lessons that are sent out to subscribers of the Viper ETF Report and the Viper Hot Stocks Report. Each service is just $34.95 per month and new subscribers get the five most recent trading lessons.

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Markets To Watch In The Week Ahead

Posted by on Feb 4, 2017

Markets To Watch In The Week Ahead

Interest Rates & Commodities

The yield on the 10 Year T-Note rose slightly last week and the lower wage growth in Friday’s job report has more now looking for a rate hike in May. The weekly chart of the inverse iShares Proshares 20+ year Bond (TBT) appears to have completed its correction 4 weeks ago as it dropped down to good support at line b.

On a move above the late 2016 high of $42.72 the quarterly pivot resistance (QR) is at $45.25. The weekly OBV bottomed in early November before the election and just pulled back to its rising WMA on the correction. It is acting stronger than prices.

The April Crude oil contract was higher last week and the daily indicators are now positive. Still a move above $57 is needed to signal upward acceleration. There is initial weekly support now at $52.40.

The gold and gold mining stocks closed the week higher and the weekly studies do suggest that a bottom is in place.  However they are extended so a pullback should be a good buying opportunity.

Market Wrap

Even though stocks rebounded sharply Friday with the Dow Industrials recording the best day in two months but it still closed the week slightly lower. The Dow Transports were the weakest down 2.1% while the Russell 2000 gained 0.52%. The slightly higher close in the broadly based S&P was a plus as was the 1914 to 1184 positive margin in advancing over declining stocks.

According to AAII the bullish % of individual investors rose 1.2% last week to 32.8% and the bearish % was up a bit at 34.2%.  It has been above 30% for three weeks in a row. This is what one would expect during a correction. The CNN Fear & Greed bounced to 60 on Friday up from 51 and is in greed territory. It was 70 a month ago.

The Sypder Trust (SPY) spent most of the week trading above and below the 20 day EMA which is now at $227.76. The close was back above the breakout level, line a.  The flag formation has upside targets in the $232-$234 area with the weekly starc+ band at $234.99. There is quarterly pivot resistance at $240 and the yearly projected resistance from a recent Viper Trading Lesson is at $241.26.

The S&P 500 A/D line turned up from support at line c (see arrow) and closed well above its WMA.  This reinforced the uptrend and the weekly A/D line closed at another new high. There is first chart support at $226.41 which was the week’s low with further at $225.

The broad trading range in the iShares Russell 2000 (IWM) has been in effect since the December 9th high at $138.25.  For the past month I have been pointing out that this is likely a continuation pattern or a pause in the uptrend. It has lasted long enough to turn many negative on the small cap stocks which is quite normal.

On the upward completion of the trading range the initial targets are in the $144 area (see arrow) which also corresponds to the quarterly pivot resistance. There is good support in the $133-$133.50 area and the late November highs. The daily Russell A/D line has moved back above its WMA and needs to overcome the resistance at line c, to signal that the correction is over.

Viper traders and investors are still long the PowerShares QQQ Trust (QQQ) from December. It closed a bit lower last week but the weekly and daily A/D lines made further new highs.  The QQQ and XLK shows no signs yet of a top.

What to do?    I last looking for a higher weekly close last week to confirm that the correction was over but I had to wait until Friday. I have been favoring the SPDR S&P Regional Banking ETF (KRE) and the Vanguard Financial (VFH) which have become out of favor on Wall Street. Both closed up 2% on Friday and a move to new highs this week will be bullish for the overall market.

It will take several more days of strong market internals to start the A/D lines trending higher. this would increase the odds of another 4-6% on the upside. Even on the down days last week the A/D numbers were not too bad and it would take a few days of 3 or 4 to 1 or worse negative A/D numbers to turn the daily A/D lines back into the corrective mode.

New negative intermediate term signals from the A/D lines would take many weeks or several months to develop. This indicates the market can move higher at least until the spring.

If you would like specific buy and sell advice you might consider my Viper ETF Report or the Viper Hot Stocks Report .  New subscribers receive five past Trading Lessons which are in-depth lessons on using pivots, stops, candle formations as well as determining both entry and exit levels. The ETF and Stock reports are sent out twice a week and each report is only $34.95 each per month.

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