Looking for Cracks…

as the S&P pauses at resistance.

You may have noticed that the market has been a bit lackluster after the initial test of $2815 in the S&P. As a key area of resistance, in fact, one of the last major areas of resistance on the path to $3,000, it’s no surprise that the S&P is taking a breath of fresh air in this spot.

Yesterday, we got the most notable pullback we’ve seen in this market in weeks, which led everyone to naturally ask…

‘Is this the spot we’ll finally see a more substantial pullback?’

When the market pulls back, it’s the perfect time to look for sector rotation — and notice signs of money flowing out of specific sectors and more importantly, where it’s flowing in.

The unique aspect of this Fed-backed, January/February rally of 2019 is that it’s been a broad market rally. While we’ve had key industry groups, such as semiconductors, cloud stocks, and cyber security names leading the pack, overall the 11 sectors of the S&P have risen together. Now, we can still identify the stronger and weaker of the bunch, but overall, the market rally has been broad.

So, what does that tell me (and you)?

Money is flowing into the market as a whole, and consumer (as well as investor) confidence is high. Earnings season was critical for stocks, as it further pumped up the semis, cloud kings, and cyber security names, and allowed investors to more easily distinguish the heroes from the zeros.

At the current point in this rally, we’ve started to see the healthcare, consumer staples, and materials sectors falter slightly, but I still wouldn’t consider this to be major sector rotation or signs of ceasing money flow.

It comes across as just a tired rally.

Yesterday, we saw money flowing out of the high flying cloud stocks — and for a day the market questioned if the cloud king’s rule in this rally would end. However, by end of day today, this pullback was just a blip in the overall big (and very bullish) picture. It’s also typical price action after the massive rally they’ve seen since December 26th, 2018.

The moral of this story is that at this time, the market has been incredibly robust.

But, overall, I’m still not seeing signs of sector rotation. The pullbacks and consolidation we’re seeing in industrials, consumer discretionary, healthcare, financials, tech and materials, at this time is still indicative to me of a strong, bullish market. These slight dips are barely enough for conservative long entries.

So, what is a trader to do?

Right now, I’m watching for signs of cracks. I have a close eye on the transportation (IYT) and housing sectors (XHB) for signals that this rally has a significant crack. As of right now, I’m only seeing a minor pullback.

I’m also keeping a close eye on the consolidation I’m seeing in the industrial sector (XLI), and I’m suspicious it may breakout to the downside, just because I think it needs a break.

But, like always, as a directional trader (and especially as this market tires) I always want to focus on the strongest technical and fundamental sectors… and narrow those picks down to individual stocks that align with my overall sector analysis.  

So, what are they?

The Case for Consumer Discretionary (XLY) and the Communications (XLC) Sectors

When I’m in a situation in the market where I have such a wide market rally on my hands, I always want to focus on the areas that have shown the most relative strength.

The relative strength that we’ve seen in XLY as well as XLC was especially evident after the December correction, and continues to remain evident on each tiny pullback we’ve seen in this market, since.

The Communications Sector, (XLC), while after the initial rearrangement of the Sector SPDR’s last fall, floundered for several months, it has come back… loud and proud, emerging from the ashes of December, lead by the likes of Facebook and Netflix. This incredibly relative strength and continued momentum its shown in January and February is the second prime area I have been focusing on this year.

A strong consumer discretionary sector is indicative of a strong market and consumer confidence. I continue to buy and hold, as well as trade, stocks within this sector along with the ETF and options on the ETF as well.  

The communications sector in particular has a lot of room to grow, with streaming services becoming the norm, as well as the growing competition in the 5G network space, that leads me to believe it’ll be strong for months and years to come.

But, of course we don’t just look at fundamentals or relative strength — I always drill down to the technicals, as that is ultimately where I make my decisions.

Look at for a special issue tomorrow where I breakdown in a video (and some deeper analysis) the technical aspect as well as the setup… you’ll be glad you did.

6 thoughts on “Looking for Cracks…”

  1. Sector rotation and money flow in and out of these seems to be a critical starting point in your daily analysis. John has always talked about it, usually flies thru the charts (transports, housing, spdrs). Thank you so much for slowing the pace so we can better understand this type of analysis. So appreciate your take and style. Could you do a short video for Foundation or Free Nightly or whatever that shows how you look at sector rotation and where the money is flowing so we can mimic this nightly ritual before drilling down into stocks and their technicals?
    As always, thank you!!!!

    Reply
  2. Hi Danielle,

    You mention the flow of money in your analysis. Do you use a standard money flow indicator from TOS, or do you glean money flow info indirectly from tools like Phoenix Finder and other Simpler Trading tools?

    Best regards and thanks for the insightful analysis

    Reply

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