below are a couple intraday charts of the “ratio” of XLP/SPX.
note, ALL the major inflections (even intraday) are equal/opposite the overall market.
so, where does that leave us? Well, you can see a minor buy pattern (two blue triangles) but I favor lower where the .618/.786 overlap. If/when this ratio hits that level I would be a seller of the SPX.
folks, bringing this up, again, because this divergence is MONSTROUS.
in order to show the divergence and how something is “not quite right in toon town” I’ve actually inverted the ratio to show the S&P 500 on top this time. t
the only reason is it shows the amazing divergence present .. when you look at the chart below notice the perfect synchronicity between the S&P500 and the S&P500/XLP. but notice around 2011, the dance breaks up … that’s a big deal to me and while it’s true you obviously can’t fight the fed and it’s different this time what I believe it tells us is the “smart money” has stayed in staples or haven’t jumped into this amazing bull market as much as anyone thinks.
now, here’s the same ratio but this time we have the STAPLES has the numerator … note, when this ratio BOTTOMS the S&P 500 TOPS and when this ratio TOPS the S&P 500 bottoms. EXACTLY … the theory is the institutions move in/out of “defensive” names during times of volatility so we expect the relative strength of the XLP’s to increase during bear markets / sell-offs (the ratio goes up) and decrease during bull markets/rallies (the ratio goes down)
the ratio HAS NOT GONE DOWN during the past 2 year rally phase … tells me the institutions have kept their powder dry.
how many institutions are there out there ….? perhaps 30-50K? and, if you think about it they own 10MM+ shares of the big names. the “big names” have, on average, say 5MM shares / day traded. so, what happens if they try to get out of a non liquid market that has been manipulated by “buy” and “sell” programs …? That’s a liquidity problem … but, perhaps I am the only remaining individual on the earth that thinks this market can correct — 20-30%. I’m alone on an island …
CLIFF NOTES: we’ve shown the sector rotation being shown by ratio analysis before. we’ve also shown how every major inflection (up and down) has been due to the ratio’s bottoming or topping. we’ve also shown how patterns have failed to hold and have confirmed the move higher in stocks the past few months …well, for now they are holding support. I ask that you go back and revisit my swing low post – it’s all about the swing low in the next couple days. go here: http://bartscharts.com/2014/03/16/swing-low-sweet-chariot/
If the Numerator is bigger than the Denominator then the ratio goes UP. If vice versa, the ratio goes down. If we put one security over another then we can plot the relative strength and note when a shift in this relative strength takes place. This shift can show rotation. What you’ll find is the XLP/$SPX ratio EXACTLY nailed all the highs and lows since 2000. Yes, the high in 2000 was accompanied by an inflection in the ratio … what is of interest now is the ratio has not made a new low while the S&P makes new highs. This divergence is important …
here’s a long term monthly of the ratio posted on this blog in/around November. 2014 has shown a divergence that has not occurred since the XLP came on line. The divergence is a “new high” in the S&P while the ratio has NOT made a new low. Monitor …
lastly, I like to use a “real world” or “main street USA” stock to monitor w/ the ratio analysis … WMT/SPX has also been extremely helpful in topping or bottoming at major inflection points. Suprisingly, this ratio has not made new lows either. In the classic technical analysis realm – looks like a double bottom forming.
CLIFF NOTES: the “chart of my lifetime” is still just that – an amazing chart of, quite frankly, my lifetime. I think it’s safe to say that the pattern from genesis of the Dow Jones Transports has been defeated. A pattern that took 45,000 days (+) to form and complete. Again, please, let that sink in … read it again, and one more time. In the world of probability this was a highly probable pattern that should have at least cause some pullback congestion ….! NOPE … not even close. Take a look at the BREAKAWAY MOVE and the explosion from the pattern area. Reminds me of the GOOGLE short at 921…if you remember, that level held for 6 months! Then exploded higher in a 100 point gap that was definitely egg in my face. O U C H …but, this pattern was less than 10 years old and it held GOOG for 6 months. Please, again, go back a couple sentences …the Transports pattern was 100+ years old. The PATTERN didn’t even hold it for a week …
CLIFF NOTES 2: I’ve gone back thru BA, AAPL, WYNN, PCLN, FB, IBM, LNKD, AMZN, SBUX, etc and those patterns WORKED and while they have all retraced the initial crack lower they sure do appear to be ready to surge forward w/ the rest of the market.
CLIFF NOTES 3: I’m baffled, a little concerned and well quite angry. Why? Not because the PATTERNS failed or didn’t….that’s called probability folks. I’m sharing my emotions because this puppy NEEDS TO CORRECT and that’s a good thing. Mentors of mine that have traded for 40+ years have taught me (which I believe) cycles that are extremely reliable and some of the most BEARISH CYCLES that we have ever witnessed (if you know it or not) hit in MAY and NOTHING happened. Read that last sentence again … it was, literally, the perfect storm of cycles. Am I questioning the cycles – nope. I AM QUESTIONING WHAT THE HELL IS GOING ON !!!!
1. IT makes up 19% of the S&P 500. I have chosen to use the VGT ETF as a proxy.
I see blue arrows which represent maximum measured moves since 2009. We are completing one of those moves up against the 5 year trend line.
I see a black/yellow triangle which represents TIME and we are 7 weeks past the last major move w/out a “nice” correction.
I see BEARISH DIVERGENCE
I see an increase of volume which reminds me of FOMO “selling at the bottom” and “buying at a top”
CONCLUSION: resistance and correction ahead. Expect anywhere from 94-100 to hold this puppy back. 64 is not out of the question for a correction.
2. Financials are 16% of the S&P 500. I have chosen XLF as our proxy vehicle for this sector
I see the “basic” AB=CD (blue arrows) holding, so far.
I see bearish divergence
I see very very low volume
3. Health Care is 13.3% of the S&P 500. I have chosen the XLV as a proxy
I see NO PATTERNS nothing but a straight up rocket ship. I reference Sir Isaac Newton and the law of gravity.
check out the RSI … so much for bearish divergence. A YEAR OF IT! But, HERE IS A KEY POINT – NOTE THE SPIKE IN THE BEARISH (RED) VOLUME AT THE LOWS (BLUE SQUARES) EVERY TIME THE SELLING SURGES THE ETF BOTTOMS. LOOK FOR THAT AGAIN ….
4. Consumer Discretionary is 11.9% I have used XLY as the proxy vehicle.
I see STRAIGHT up w/ a POTENTIAL BUTTERFLY SELL PATTERN FORMING.
I see bearish divergence
I see an intraday sell pattern.
5. Industrial s make up 10.7% of the S&P 500. I have chosen XLI as the vehicle proxy.
I see the same picture as the past couple. An amazing and powerful bull move up w/ no hint of corrections at all. some daily patterns are present in/around here.
6. Energy makes up 10.5% of the S&P 500. I have chosen XLE as the vehicle proxy.
please see this post on the IMPORTANCE of the ENERGY SECTOR w/ regards to SECTOR ROTATION and the business/economic cycle:
7. VIX – it’s different this time and there is NO FEAR IN THIS MARKET – NONE. All I can say (note: bold,underline, italicized) is REALLY ?????
8. I have shown the importance of ratio analysis and especially the XLP/SPX ratio. I expected it to be making new lows based on the equity action – NOPE, it’s showing remarkable strength which tells me the “big boys/girls” are rotation into this sector. Watching the “standard” .618 and .786 retraces to hold this pullback. If we go into new lows the equities will continue to surge …
CLIFF NOTES: the cash S&P closed at 1909.78 yesterday. 1909 days ago was 03/07/2014. Price is equal to time …What I have also shown is, simply, how powerful this move IS … zero, notta, none, null set, etc. describes a single swing low being broken. Note the blue lines … we have discussed them before. Until a swing low breaks this band is going to continue to play. TONS of patterns showing SELLS but perhaps TONS of patterns will all fail?
in what appears to be the largest IPO ever ALIBABA should be coming to the street …pushing the limits of 20 BB it’s something to be watched. Not for the John Q Public but for the banks Credit Suise, Goldman, Morgan Stanley, etc. are going to make 100’s of millions on this one. So, I don’t think they will let this one go by the wayside …
but here’s what’s interesting … we have the Chinese Yuan FX pair causing quite the unwind and a representative ETF, FXI, of China is on a clff …here, take a look:
this sure is an amazing dance to watch … kind of reminds me of the Blackstone (BX) IPO . These two charts should tell you the story:
the bears are getting hungry and this IPO is going to be one heck of a show. the biggest IPO in history couldn’t possibly end up w/ the same fate as BX? Could it …? Stay tuned …
CLIFF NOTES: my initial quick look at the S&P appears wrong from the counting perspective. Once the gap up occurred it signaled the characteristics of a C wave so I readjusted and am looking at a FLAT correction occurring and it should be done at the close today or just a little higher. Expect selling to come in …
CLIFF NOTES: remember, this has been an amazing 5 year run. with multiple classic patterns completing on a Monthly basis, parabolic charts along w/ rotations from the institutions I favor a continued corrective move. therefore this chart is provided: