MARKET GAUGE: Confirmed Uptrend
*Weekly Sector Watch highlights several industry groups that have experienced a measurable change in strength or weakness relative to other groups over the last 3-6 week period.
SECTORS EXHIBITING RECENT STRENGTH: Software (Medical), Internet (Content), Wholesale (Electronics), Electronics (Misc. Products) Electronics (Wholesale), Electronics (Parts), Medical (Ethical Drugs), Medical (Long Term Care), Medical (Long Term Care), Medical (Biotech).
SECTORS EXHIBITING RECENT WEAKNESS: Energy (Solar), Energy (Coal), Mining (Metals/Ores), Banks (Super Regional), Steel (Producers), Transportation (Air Freight), Computer (Data Storage).
OVERVIEW: Although technically still in a confirmed uptrend, some caution flags are starting to appear from our prospective. We continue to have somewhat of a split market with tech and small caps preforming quite well, while industrials, financials and many larger cap names continue to struggle, or simply keep pace. Additionally, we see distribution days starting to mount in some of the indices we track here, for instance, the Russell 2000 ETF, which had shown little in the way of distribution for weeks, has now tallied five distribution days in just the last 17 sessions, while the Nasdaq Composite registered three such days just this week. Finally, we note many growth stocks have been hit hard very recently, while many stocks within the somewhat defensive medical sector have shown some recent strength. We are by no means are calling a market top, or anything of the sort. Anyone that has followed us here for any length of time knows that we don’t make such wild, foolish predictions. We simply track the indices for signs that we may need to increase, or curtail some of our trading activity, tighten stops or even look for a shorting opportunities if indices continue to show signs of distribution or weaken further. Whether it is a short term breather in an otherwise longer term uptrend, a sharp correction, or start of something different altogether, we shut out all the noise and look to the non-biased behavior of the indices to guide our trading. So with that, let’s take a closer look.
SPY- The SPY ETF broke some key resistance near $275 to start the month of June, but was turned back after a few attempts at the next area of resistance, near $280. This week the index lost nearly 1% and has threatened to return to the penalty box that is highlighted on the chart below between $270 and $275. One of the issues with this, should it occur, is that it may likely pierce its 50 day EMA in the process, and as we know, uptrends live above their 50 day moving averages, note the left side of the chart. The index continues lag behind the Nasdaq and Russell 2000 and the possibility exists that if the index fails to follow thru on its recent attempt at new highs and turns down, it may quickly drag the rest of the market with it. The ETF did lose the 5/18 distribution day off the current count after Fridays close due to time leaving it with five such days on the books. The S&P 500 enters next weeks trading near a key level of support, let’s see if the bulls come to the rescue.
NASDAQ- The Nasdaq, along with the Russell 2000, have definitely been the stars of the show since a confirmed uptrend began in April, but some leading stocks have been hit hard recently. Additionally, a cluster of distribution days have shown up in lately with the index chalking up four of these days in the last eight sessions and three within the last five sessions. The index also closed poorly for the week finishing in the bottom third of the range after notching a new all-time high on Wednesday. Not every day, or week within an uptrend can be all roses, so the confirmed uptrend continues, but we always must see the market from both sides if we want to have longer term trading success. So, we will enter next week being attentive for any further signs of distribution. We’ll consider the recent action a preliminary caution flag.
QQQ- Meanwhile, the Nasdaq 100 has been in an uptrend of its own having advanced over 13% since early April. In early June the index broke above the old highs set back in March, but have yet been unable to pull away convincingly. The index returned the penalty box on Tuesday, before heading back north to new highs on Wednesday, but pulled back to the top of the zone by weeks end. The index starts next week sitting virtually on top of support near $175. It will be important for any further selling in the index to hold support near the $170-$171 level which is currently running hand and hand with the 50 day EMA. The index sits with four distribution days in the current count.
IWM- The Russell 2000 uptrend continues to look solid, but we have noticed an uptick in distribution over the last three weeks. The index, which showed virtually zero distribution thru the month of May, has now picked up four such days in June. Fridays session showed heavy volume, but we must look at this day in context as the annual Russell 2000 rebalancing took place which greatly inflated volume over normal levels. The small cap area has definitely been a place of refuge for those looking to avoid the ramifications of a trade war effecting their stocks, and they have also been a big benefactor of the Trump administrations pro business polices. We have not seen any attempt by the index to shake out traders since it revisited the breakout area in late May, so perhaps we should be on our toes here.
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