Energy, Financials still working well- Telecom, Utilities definitely not
Technical Strategy Video (Recorded Monday, October 11th):
Key Takeaways
- Early Strength looks to have failed for US indices, and trends & momentum remain negative short-term for US Equity indices. SPX requires a move back over 4430 (SPX) but ideally 4465 to expect this weakness is complete. Downside target is 4225
- Energy and Financials remain the best two S&P GICS Level 1 groups technically right now, while Utilities and Telecom continue to lag and underperform
- US Dollar Still trending higher and has made a sharp breakout vs the Yen that looks to continue. Yen weakness has bucked the trend of strengthening during a weak time
SPX on hourly charts shows this area of resistance near 4430 while undercutting the gap from early last week would heighten the probability of a retest/break of last week’s lows. Last week’s bounce has not officially broken out of its downtrend, and ideally requires a move over 4465.
Energy -Further strength still likely into late October before a pause
As discussed last week, Energy remains one of the better groups to overweight following Crude having advanced to the highest levels since 2014. XLE, has gotten stretched after leading this move, while both OIH and XOP have narrowed the gap in recent days. XLE, to its credit, has advanced to new highs for 2021
- Favored Stocks within Energy: APA, WMB, MPC, PSX, FANG, AR, DVN, COP, EOG
- Relative charts of Energy have nearly reached March 2021 peaks and a trendline connecting relative peaks of RYE/RSP (Ratio charts of Equal-weighted Energy vs Equal-weighted SPX) Thus, I’m expecting this group likely stalls out near-term in 1-2 weeks after reaching this area below (Red Line) This might result in a rotation out of Energy near-term and back into Technology
- DeMark tools like TD Sequential and TD Combo show counter-trend exhaustion possibly arriving within two weeks after this run-up, and this is apparent in USO, XLE, OIH, and XOP. Thus, after such strong performance, it’s unlikely that this continues uninterrupted into year-end without any ripples. Yet, pullbacks should be buyable in Energy
Telecom really starting to weaken materially and should be avoided near-term:
- Stocks like VZ have hit new 52-week lows, while T is set to reach the lowest daily close since 2010.
- Stocks like CHTR, CSCO, FB have helped to provide some relative strength in Telecom indices and ETF’s like IYZ, (Ishares US Telecommunications ETF), which without these stocks would be substantially weaker.
- Favored Stocks within Telecom are names like DISH, ANET, MSI, while others like ROKU, T, TMUS, VZ are laggards, and to be avoided technically
- While Utilities and REITS have underperformed all other groups on a rolling one-month basis, with negative returns approaching -8%, Communication Svcs, and specifically Telecom looks to be catching up.
IYZ broke the uptrend from this Spring as well as last October lows, which has resulted in weakness in recent weeks. The SPX GICS Level 1 SPDR Select Sector Fund for Communication Services ETF, or XLC, has proven to be one of the weakest in performance over the last month, dropping nearly 5%. Pullbacks down to 31 appear likely and below that could reach 30.
Dollar/Yen likely pushes to 115.50 before stalling on breakout. The increase in the US Dollar has accelerated in recent days vs the YEN, shown below as USD/JPY, Dollar/Yen which jumped above an intermediate-term downtrend earlier this past year and has gained speed in the last few weeks, despite equity markets having churned.
While the Yen carry trade seemingly lost appeal after the plunging of US interest rates over a decade ago, technically this multi-year breakout in the Dollar vs Yen early this year has now begun to accelerate. This might seem unusual given that US equities remain in near-term downtrends, and the Yen managed to fall sharply during the last couple weeks of September, despite this Equity index weakness.
Movement up to 114.37 initially near October 2018 peaks looks likely and potentially 115-115.50 is possible technically. However, given momentum moving rapidly back to overbought levels while DeMark indicators could come together within 2-3 weeks, it seems like gains into late October/early November might reverse back lower.
Weekly USDJPY chart below- Near-term strength still likely after this post breakout consolidation looks to have finished into early September this year.
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