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.
notice the divergence!
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.
XLP / SPX – note divergence and NO NEW LOWS on the ration ….
CLIFF NOTES: the XLP/$NYA ratio, when it inflects UP or DOWN, has been responsible for every major pivot in the US Equity Structure over the past 14 years. It is sitting on a cliff of support, which if lost, will signify a move OUT OF “risk adverse” asset class of staples and I would expect the entire equity complex to explode in a phase transition of parabolic proportions. Stay tuned … if it holds, then perhaps the SELL pattern on the $NYA will hold and a “normal” and “needed” correction will ensue. Trying to be to the point and point readers in a less looked at aspect of institutional rotation and flow of funds.
Let’s start at the beginning w/ definitions –
New York Stock Exchange Index ($NYA):
An index that measures the performance of all stocks listed on the New York Stock Exchange. The NYSE Composite Index includes more than 1,900 stocks, of which over 1,500 are U.S. companies. Its breadth therefore makes it a much better indicator of market performance than narrow indexes that have far fewer components. The weights of the index constituents are calculated on the basis of their free-float market capitalization. The index itself is calculated on the basis of price return and total return, which includes dividends.
The two biggest benefits to investors of the NYSE Composite Index are (a) its quality, since all its constituents have to meet the stringent listing requirements of the exchange, and (b) its global diversification, with non-US companies accounting for more than one-third of market capitalization. NYSE-listed foreign companies have their headquarters in 38 different countries, with the most foreign issuers from Canada, China, the U.K., Japan and Mexico.
Consumer Staples (XLP)
Essential products such as food, beverages, tobacco and household items. Consumer staples are goods that people are unable or unwilling to cut out of their budgets regardless of their financial situation. Consumer staples stocks are considered non-cyclical, meaning that they are always in demand, no matter how well the economy is performing.
Consumer staples can be a good option for investors seeking slow and steady growth.
Ratio Analysis using Technical Patterns:
Numerator / Denominator
If we want to see if a certain (security vs sector) or (security vs security) or (sector vs sector) or (whatever) we put one on top of the other. IF the ratio goes UP then the top “thing” is stronger. If the ratio goes DOWN the bottom “thing” is stronger
XLP/$NYA :
w/ the definition of staples above, one would think that “institutional money” would rotate into defensive names during times of volatility, corrections or bear markets.
if we plot the ratio above THEN when XLP/$NYA goes DOWN we can think the party continues … when it completes a bottoming pattern and goes back up then a defensive rotation should occur signifying relative strength increasing and a move into the staples.
So, w/ the definitions complete, let’s see where we are:
In the charts below you can see that, back in June we saw a pattern completing in/around the 10900-11080 level. It did in fact hit and the market sold off. The broader indices are making new highs and the bullish aspects of this current picture are unquestionable strong. On an intraday basis, we are approaching a key level at 10988. If we are going lower then I would expect it too hold as resistance.
NYSE Index 4 hour chart
here are the charts from June 2014.
doing some geometry work, but basically showing resistance as noted in the above chart.
now, what about the ratio? Is that telling us anything of importance? Well, yes.
Ratio Analysis w/ $NYA overlaid on top of the ratio
Bunch of stuff going on here:
the blue line is the $NYA
the candles is the ratio of XLP/$NYA
note the blue rectangles – at every MAJOR pivot the ratio is almost a mirror image of the $NYA.
the big “clue here” is that the ratio has held the 50% retracement level since 10/2011. folks, that’s almost 3 years. stop and think for a moment about that one … notice in the past we had straight UP moves and DOWN moves which corresponded very nicely to the $NYA equally and opposite. HOWEVER, now for almost 3 years the XLP has, on a relative strength basis, held it’s own, so to speak.
this divergence is something to watch and be very aware. YES, I know that we are continuing higher and higher. I also know that it’s been confirmed that the Central Banks around the world have injected 29 trillion (yes 29 trillion) into the US equity structure…it’s the greatest ponzi scheme of our time.
what’s the bullish picture … ? Well if we lose that level to the downside that has held for 3 years THEN this market will EXPLODE higher and vacuum into the stratosphere. not that I don’t want that ….but I do want a NORMAL market. Folks a .382 correction is very bullish and natural …what’s so wrong w/ that?
If you do ratio analysis, you absolutely need to keep this level and pattern on your radar screen ….
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/
CLIFF NOTES: patterns exist on the ratios/we use ratio analysis to look for sector rotation and when the RATIO’s inflect there are usually inflection points. We are at a key level in the WMT / SPX ratio. Also, I added the NYSE Index overlaid. Note EVERY HIGH AND LOW was at this ratio’s SUPPORT and RESISTANCE. We are at key support – TODAY – on this ratio. Also, the XLP/SPX ratio has a foldback occurring and I would “think” it will find support but sure doesn’t look like it …
BOTTOM LINE – this entire thing is in unchartered territory. Understand the scarce resource and monetize on that … stay away from these markets.
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.
IT ETF 19% of S&P 500
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
XLF Financial ETFintraday XLF
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: sector rotation is a fact of life …we’ve shown how the institutions follow a well defined script and how, usually, energy is the last shoe to drop before the inevitable correction (it’s different this time) occurs. ratio’s are important because they show relativestrengthof something versus something. In this case, we have the XLP (consumer staples) over the broader S&P 500. The thesis – in times of volatility/risk off – there is a move to consumer staples and the consumer staples become stronger …the NUMERATOR (XLP) is stronger than the denominator (S&P 500).
CLIFF NOTES 2: the line below is the S&P 500 and at EVERY top since 2000 (labeled w/ a blue rectangle and the word “top”) the ratio bottomed. What’s interesting is the new highs in the S&P 500 were not confirmed by lower lows in the ratio. That’s something to monitor and watch….note, we do have a MONTHLY signal reversal candle present so, monitor this ratio closely ….
For those who have been following me since I started this summer, you’ll find I spend considerable amount of time analyzing the RELATIVE STRENGTH of the STAPLES vs the S&P. Why? The theory is that, in times of volatility and/or bearishness the “big guys” (read: institutions) will rotate into a defensive posture such as staples. We need “staples” to live … water bottles, food stuffs, toilet paper, toothpaste, etc. This does not mean that they won’t go down it simply means they are stronger from a relative strength basis. If the ratios is GOING UP then volatility and bearishness is taking place … if the ratio is going DOWN then “good times” are here and, generally speaking, it’s BULLISH. Where I take it to another level is in the pattern recognition … by using advanced pattern recognition techniques across the entire circle of life I try to develop a thesis and then deploy capital in the most risk adjusted manner …
the week of October 07, 2013 we have an AMAZING BUY of the ratio that was precise in both PRICE and TIME. It hit, the market sold off but it was subsequently taken out and the PATTERN FAILED. End result: BULLISH for the stock market.
it was also noted, that the .02 level was a potential target. at the beginning of the new year this target was hit and, while it held intraday it has been subsequently been defeated. In my mind, I try to stay away from intraday spike highs or spike lows …however, if we get a weekly close below a pattern level THEN, probability says it’s a failed pattern. Take a look at the below chart … we have a weekly close below. End result: BULLISH for the stock market.
so … while we aren’t too far below the level depicted (1.27 and .786 overlap – usually strong support) I can tell you we need to get back up above and close above on a daily basis that level OR this S&P move could continue.
also, I put my trust weekly 14 period RSI in to check out the “zones” for it’s support or resistance … I went back as far as my data would allow and I can tell you that 1) we have bullish divergence on the DAILY chart and on the weekly this is the lowest the RSI has ever been.
note, do we have two patterns failing on the important XLP/SPX ratio?
note at major turns, the ratio gives a good idea of inflections … it needs to turn up (xlp/spx) for the bearish case
the other ratio we have looked at is the Walmart Greeter ratio … same thought process, except this is a single stock. The “whole world” loves WMT so if the volatility comes back, THEN, the “big boys” will rotate to that defensive hallmark of Walmartians. Guess what, it completed it’s pattern TODAY and, should go any lower …if the bear case is to be credible w/ our ratio’s. Here’s the last post on the Walmartians:
we completed a perfect price/time pattern BUY on the ratio and it did, in fact, respect the pattern level. HOWEVER, since then we have taken out the lows of that pattern and if we go back you’ll see that the .786 was ‘still a target.’ the importance of this ratio cannot be overstated – at every major inflection point since 2000 (I don’t have data that goes back any farther) it has pointed to all of the tops and bottoms of the market. perhaps we’ll go down and tag the .786 … what I can say, is if we blow thru the .786 then it will show a lack of institutional fear in this market as the thesis is the staples start to out perform as rotation occurs in a volatile or bearish market. so far, this ratio has been stagnant and correcting for a very long time … let’s stay tuned and see what a little lower does for our ratio.
additionally, I have included the WMT gauge. please see these posts to get a feel for the importance of this ratio:
this AM, our pattern that we have been following has completed. what does that mean? the pattern either works or it doesn’t … if it works then our thesis is that the staples (as a sector of the overall market) will start to outperform on a relative strength basis (no not the oscillator) the general market. when this has occurred in the past, it has very nicely timed inflections points to the down side in the market ….
Long term monthly w/ bullish stair steps present
stay tuned … the symmetry of the BUY pattern in PRICE and TIME is very powerful that this level should hold.
