Strong Rotation on the Weekly RRG

For a few weeks now, the improvement in the energy sector (XLE) is becoming increasingly visible in the lengthening of the XLE tail on the Relative Rotation Graph. The recent rotation from lagging into improving on the weekly RRG is now starting to pick up steam and also move higher on the RS-Ratio scale, indicating a further improvement of relative strength.

Daily Rotation is Confirming Strength

This improvement is further emphasized on the daily RRG, where we find the XLE tail well inside the leading quadrant with a recent “hook” back up, following a dip in relative momentum.

Clockwise vs. Counter-Clockwise

As a side note, this is a good example where a tail “seems” to be making a counter-clockwise rotation. But in reality, under the hood, on a smaller time frame, you can see there is a clockwise rotation visible.

In this case, the pivot on the daily tail was on 4/1 (no joke). When I zoom in on 4/1 and the surrounding days using an hourly RRG, a clear clockwise rotation shows up.

Price Breaking Major Resistance

The energy sector was also mentioned in my previous article as one of the sectors that was close to breaking a major overhead resistance level.

This is now happening. With the excess supply of around $94 now out of the way, new upside potential was unlocked. This will certainly help further improve the relative strength of this sector.

Industries

From the Sector Summary page, we can dive deeper into the energy sector by opening up an RRG that shows the rotations for the various industries inside the sector. Just click on the small RRG icon at the end of the line.

Initially, this RRG will use the $SPX index as the benchmark. The overall strength of the sector is clearly visible in all groups (except Coal), moving inside the improving quadrant at a positive RRG-Heading.

However, things change when we switch the benchmark to XLE, which allows us to see the rotation of these groups within their own universe. We already know that the sector is doing well, but which industries should we focus our attention on?

Exploration & Production Stands Out

This changes the picture tremendously and immediately shows that there is really ONE group that is leading the Energy sector, and that is Exploration and Production.

The price chart for this group speaks volumes. The upward break already happened a few weeks ago, and now relative strength is really picking up the pace, with both RRG lines turning higher above the 100 level and pushing the tail further into the leading quadrant on the RRG.

Zooming in on Individual Stocks

Loading the predefined RRG for members of the Energy sector and then hiding tails/stocks that are not in exploration and production gives the RRG above. Going over the individual price charts reveals that the stocks inside the leading quadrant, the cluster in green, have already made a significant move higher in price terms. They have been leading the initial rally for this group.

When looking for better risk/reward opportunities, the tails a little more to the left and even inside the lagging quadrant probably offer better probabilities. Remember, the sector and the group are already doing well, so these stocks are well inside the improving or leading quadrant and traveling at a strong heading when you use $SPX as the benchmark.

One of these stocks is OXY. Its tail has just moved into the improving quadrant; though still a short tail, it’s moving in the right direction. The upward break in the price chart this week will certainly help a further improvement in relative strength and likely make this one of the new leaders in this industry.

#StayAlert and have a great weekend, –Julius

One day doesn’t make a trend—that’s one lesson we learned from this week’s stock market action.

The March non-farm payrolls data revealed that the US economy added 303,000 jobs, which is higher than the estimated 200,000. Additionally, the unemployment rate dropped to 3.8%, down from 3.9%. After yesterday’s massive selloff—mainly due to comments from Fed officials suggesting interest rate cuts may not happen this year—you’d think today’s strong jobs report would have made investors jittery. It would extend the narrative that interest rates will remain on hold for longer.

But that’s not what happened. Investors celebrated the strong jobs report, with equities and Treasury yields rising. The broader indexes closed higher, and the VIX pulled back to 16.13, which was a little high but not too alarming. Although the indexes were down for the week, seeing the broader markets close higher was encouraging after the selling pressure we saw on Thursday.

It’s possible the stock market was blowing off some steam. Nothing goes up in a straight line, and investors should expect an extended market to pull back. Yesterday’s pullback, although massive, was only about a 1% decline. Given that economic data is healthy, investors have no reason to worry. This week, we had good manufacturing and jobs data, so there’s no reason for any panic.

Several stocks made all-time highs, as can be seen by the extensive list of stocks that made the StockCharts New All-Time Highs scan. Some notable names filtered in the scan are Meta Platforms (META), ConocoPhillips (COP), and Exxon Mobil (XOM). Several companies in the Energy sector were filtered in this scan. 

Energy stocks have been on a tear. The Energy Select Sector SPDR ETF (XLE) reached a new high again, and its steep ascent is still in play. And it’s not just oil prices that are going up—the SPDR Gold Shares ETF (GLD) and iShares Gold Trust ETF (IAU) also hit new all-time highs. Commodities continue to show strength, as seen in the Invesco DB Commodity Index Tracking Fund (DBC).

CHART 1. COMMODITY PRICES CONTINUE TO RISE, ESPECIALLY OIL AND GOLD. Oil prices have climbed higher in a short time. Gold and other commodity prices are also rising.Chart source: StockChartsACP.com. For educational purposes.

But it wasn’t a great day for all stocks. One stock that got hit hard today was Tesla, Inc. (TSLA). It was one of the most active stocks in the S&P 500, closing lower by 3.59%. The stock is trading below its 200-day simple moving average with a declining relative strength index (RSI), which is getting close to oversold territory. Looking at the weekly chart of TSLA below, the stock is at a support level, but there’s room for it to drop much further before seeing any signs of reversal.

CHART 2. TSLA STOCK COULD BREAK SUPPORT. TSLA’s stock price could fall to its next support level at around $102.Chart source: StockCharts.com. For educational purposes.

It’s encouraging to see a recovery at the end of the trading week, but what would be even better would be to see a broad-based rally. We may get that as earnings week kicks off. A rotation into Industrials, Financials, and Materials would positively impact the stock market. So watch the StockCharts Sector Summary panel to identify when the rotation begins.

Earnings Showdown

Earnings season kicks off at the end of the week of April 8, starting with the big banks. That means the focus will be on corporate earnings in the next few weeks. According to FactSet, Q1 year-over-year earnings growth rate for the S&P 500 is expected to be 3.6%. If companies report higher-than-expected earnings and revenues, the market will probably continue trending higher.

As long as companies generate positive cash flow and show higher profit margins, investors have no reason to sell their investments.

Important inflation data will also be released next week. The March CPI and PPI will be reported on Wednesday and Thursday. So fasten your seatbelts! Next week could see some choppy trading activity. But don’t let a little choppiness make you change your investment strategies, unless there’s catastrophic news beyond anyone’s control. 

End-of-Week Wrap-Up

S&P 500 closes up 1.11% at 5,204.34, Dow Jones Industrial Average up 0.80% at 38,904; Nasdaq Composite up 1.24% at 16,248.52$VIX down 1.96% at 16.03Best performing sector for the week: EnergyWorst performing sector for the week: Health CareTop 5 Large Cap SCTR stocks: MicroStrategy Inc. (MSTR); Super Micro Computer, Inc. (SMCI); Coinbase Global Inc. (COIN); Vistra Energy Corp. (VST); Vertiv Holdings (VRT) 

On the Radar Next Week

March Consumer Price Index (CPI)March Producer Price Index (PPI) More Fed speeches Earnings from Citigroup (C), JP Morgan Chase (JPM), Wells Fargo (WFC), Delta Airlines (DAC)

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The VIX ended the week just above 16, bringing it to its highest level in 2024. What does this tell us about investor sentiment, and how does this compare to previous market cycles?

Let’s take a quick tour of market history through the lens of the VIX, focusing on which levels have tended to be good signals of market reversals, and then relate that back to our current setup with a VIX around 16 as we move further into the 2nd quarter of 2024.

We’re starting with a ten-year chart of the S&P 500 index (shown in pink) and comparing that to the VIX (shaded in gray). You’ll probably be drawn to the spikes in the VIX in 2020, 2019, and 2015, each of which represented significant drawdowns for the S&P 500.

Why does the VIX tend to push higher when the SPX drops lower? This goes back to one of my favorite market maxims, “The market goes up the escalator and down the elevator.” Basically, bull markets are marked by slow-and-steady accumulation on the way up, as investors add positions over time. But when investors get nervous, fearing a drop in stock prices, they tend to panic and sell very quickly. Indeed, there is often a feedback loop where selling drives prices lower, which then begets further selling, which drives down prices even further.

The VIX is often called the “fear gauge” because of this inverse relationship to stock prices, but I prefer the term “uncertainty gauge” as a better reflection of what the series is actually designed to measure.

Let’s look at the inverse relationship in more detail.

Here we’re showing the VIX in the top panel, the S&P 500 in the middle, and then the 20-day rolling correlation between the two data series. Notice how there is often a strong inverse relationship between the two? While there have occasionally been spikes in the correlation to around the zero level (basically, no relationship between the two data series), the correlation has usually remained in the -0.7 to -1.0 range.

When I’m considering two series with an inverse relationship, it can be helpful to invert one of the data series.

Now we’re showing the VIX upside down in the top panel, which makes it easier to recognize how drops in the S&P 500 usually coincide with spikes in the VIX. So have we seen enough of a rise in the VIX to raise a red flag on this bull market? Not quite, in my opinion. But I do have some key levels I’ll be watching through Q2.

In a low-volatility environment like the one we’ve seen in the last eight months, similar to 2019 and 2017, the VIX spends a great deal of time below the 15 level (green-shaded area). Thus, a VIX below 15 represents a low-volatility bull market phase. When the VIX pushes above 15 but remains below 20 (blue-shaded area), this suggests that the long-term trend is still positive, but we are likely entering a pullback phase within that bullish trend. When we see a VIX push above 20 but not above 28.5 (yellow-shaded area), that would mean we are now in a high-volatility environment. The S&P 500 is probably in a clear pullback by now, and investors will be questioning whether it’s the beginning of a much deeper bearish phase. 

The last time we broke above 20 was heading into the October 2023 market low. I was fairly bearish at the time, because the VIX pushing above 20 usually means we’re just getting started with a market decline. The strength of price action off the October low, along with bullish rotations in breadth and momentum indicators, told us that the VIX above 20 was a false alarm.

Now, if the VIX pushes above the 28.5 level (red-shaded area), then the S&P 500 has essentially entered a confirmed bearish phase. This is a level I learned about from Tim Hayes at Ned Davis Research, based on research they had conducted on a deep history of the VIX. The last two times we saw a rotation above that key 28.5 level? November 2021 just before the 2022 market top, and February 2020 at the beginning of the COVID era. A VIX above 28.5 is actually fairly uncommon, and I’ve learned to treat extremes in the VIX as a major red flag and a good reason to rotate to risk-off positions.

A quick review of market history tells us that a VIX around 16 indicates a likely pullback scenario within a bullish phase. However, it also tells me to be prepared for a higher VIX, which would mean higher levels of uncertainty. As we’ve seen with these charts, higher uncertainty usually means a higher risk that the market takes the elevator down to much lower levels!

RR#6,

Dave

P.S. Ready to upgrade your investment process? Check out my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

In this edition of StockCharts TV‘s The Final Bar, Dave answers questions from The Final Bar Mailbag. Today he talks about how to use the ADX indicator, how growth vs. value may have formed a double top pattern, how to use VWAP for intraday and historical analysis, and what a sell signal from MACD should look like!

This video originally premiered on April 5, 2024. Watch on our dedicated Final Bar page on StockCharts TV!

New episodes of The Final Bar premiere every weekday afternoon. You can view all previously recorded episodes at this link.

In this episode of StockCharts TV‘s The MEM Edge, Mary Ellen shares what to be on the lookout for to tell if it’s safe to put new money to work. She also shares the weakness in select sectors and which areas she suggests to underweight. Last up, the art of buying stocks that have pulled back is discussed.

This video originally premiered April 5, 2024. Click here or on the above image to watch on our dedicated MEM Edge page on StockCharts TV.

New episodes of The MEM Edge premiere weekly on Fridays. You can view all previously recorded episodes at this link.

If you’re looking for stocks to invest in, be sure to check out the MEM Edge Report! This report gives you detailed information on the top sectors, industries and stocks so you can make informed investment decisions.