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Monday, March 4, 2024

Three ETFs Counsel Additional Draw back | The Conscious Investor


This previous week had all of the potential to see a revival of the good bull market of 2023. The September inflation knowledge, Apple’s newest product bulletins, and Arm’s IPO all appeared had the likelihood to reignite the fireplace of bullishness for buyers.

By Friday’s shut, nonetheless, the S&P 500 seemed to be limping into the weekend. Development shares struggled and defensive sectors thrived because the market took on a really risk-off really feel to wrap the week.

With this week’s pullback, the S&P 500 chart seems to be forming a possible head-and-shoulders sample.

Notice the height in late July round 4600, surrounded by decrease highs in June and August. If and when the SPX can break under the “neckline” fashioned by the interim lows in June and August, that will counsel additional deterioration to at the very least the 200-day transferring common.

Let us take a look at three key ETFs, all exhibiting indicators of distribution, all with additional draw back potential, and all with implications for additional deterioration in threat property.

Semiconductors (SMH)

Semiconductor shares have performed fairly properly because the October 2022 low, with the robust relative power demonstrating constant outperformance over the S&P 500 index. This ETF superbly illustrates the dominance of large-cap development shares over different cap tiers in 2023.

In July, we famous a bearish momentum divergence, the place worth moved increased whereas the RSI trended decrease. This sample usually signifies an exhaustion level throughout bull phases, and suggests restricted upside because of weakened optimistic momentum.

After testing resistance round $160 twice in July, the SMH registered a decrease excessive in late August. If the worth would push under $142, that will imply a brand new decrease low as properly. Given the weakened relative power profile and detrimental momentum swing, there seems to be very actual potential for additional draw back on this bellwether business group.

Homebuilders (ITB)

For many of 2023, homebuilders had been firing on all cylinders with constant new highs and a gentle uptrend for relative power. Momentum traits, as measured by the RSI indicator, had been much like earlier bullish market phases.

Notice the excessive costs in July and August, the place the ITB examined the identical resistance stage round $89 many occasions over a four-week interval. Then, across the Labor Day vacation, we see a brand new decrease excessive round $88. Much like semiconductors, this main group started to point out indicators of degradation, because the uptrend had stalled out.

The relative power line, which had been trending increased since November 2022, has now turned decrease. This means that the business group is underperforming the S&P 500, and in addition means that institutional buyers are rotating their property to different alternatives, like Vitality shares.

We are able to determine worth assist round $81 from lows in July and August. This stage was reached as soon as once more this week, with Friday’s drop as soon as once more pushing worth right down to potential assist. If we see a break under $80, that will full a breakdown sample, with the peak of the sample indicating a minimal draw back goal round $73.

Bonds (AGG)

This final chart is completely different than the others, in that it has been in a confirmed downtrend for a while now. The iShares Core U.S. Mixture Bond ETF (AGG) is predicated off a well-liked bond market index and combines Treasury bonds and company bonds into one ETF.

Whereas the Nasdaq 100 and S&P 500 indexes broke above their February 2023 highs in April and Might, respectively, AGG by no means was capable of accomplish this breakout. A trendline utilizing the highs since Might present a reasonably regular downtrend in bond costs, resulting in a key assist stage round $94.50.

Notice how the RSI has remained under 60 throughout this era as properly. In bearish market phases, the whole vary of a momentum indicator usually strikes decrease. So long as the RSI stays under 60 on worth bounces, it might counsel that this downtrend in bond costs could be very a lot intact.

Why would decrease bond costs counsel additional draw back for equities? A fast have a look at the Ten-Yr Treasury Yield reveals how increased charges are sometimes not a super setting for development shares.

Decrease bond costs imply increased bond yields. And better rates of interest are a headwind for development shares, as the worth proposition for development shares is the potential for future earnings development. If rates of interest are going increased, that implies that the longer term earnings of development corporations are price much less right now.

Because the panel slightly below the Ten-Yr Yield reveals, development shares have been holding regular with worth shares regardless of this rising fee setting. But when bond yields preserve trending increased, this might put increasingly more stress on development shares. which in turns means extra potential draw back for our growth-oriented benchmarks just like the Nasdaq 100 and the S&P 500.

The S&P 500 has not but confirmed a head-and-shoulders topping sample. However given the weak tendencies in these three key ETFs, it seems that a breakdown for the S&P is more likely than buyers could count on!

RR#6,

Dave

P.S. Able to improve your funding course of? Take a look at my free behavioral investing course!


David Keller, CMT

Chief Market Strategist

StockCharts.com


Disclaimer: This weblog is for instructional functions solely and shouldn’t be construed as monetary recommendation. The concepts and techniques ought to by no means be used with out first assessing your individual private and monetary state of affairs, or with out consulting a monetary skilled.

The writer doesn’t have a place in talked about securities on the time of publication. Any opinions expressed herein are solely these of the writer and don’t in any method symbolize the views or opinions of another particular person or entity.

David Keller

Concerning the writer:
, CMT is Chief Market Strategist at StockCharts.com, the place he helps buyers reduce behavioral biases via technical evaluation. He’s a frequent host on StockCharts TV, and he relates mindfulness methods to investor determination making in his weblog, The Conscious Investor.

David can be President and Chief Strategist at Sierra Alpha Analysis LLC, a boutique funding analysis agency centered on managing threat via market consciousness. He combines the strengths of technical evaluation, behavioral finance, and knowledge visualization to determine funding alternatives and enrich relationships between advisors and purchasers.
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