Taking a Look at the Major Sector

July 6, 2023No Comments

Hello and welcome to the Smart Money Dumb Money Show. I’m your host as always, Keith Richards. I’m President and Chief Portfolio Manager of ValueTrend Wealth Management, and I’m a Technical Analyst. Today we’re going to be looking at some sectors, in fact, all of the major sectors of the S&P 500 and how they are looking after an amazingly strong performance on the S&P 500 in the first half of this year. Now, any of you who follow my blog, and I’d imagine that many people who are watching this video do in fact follow the blog, are probably pretty aware that we’ve talked a lot about the concentration or lack of breadth in the market, particularly when it comes to the S&P 500. I’ve shown you charts of the more broadly based New York Stock Exchange average, for example, where you see that the market has not in fact broken out to new levels and broken out through resistance.

It’s just the S&P and the NASDAQ, which of course influences the S&P with well over 30% of its holdings in the same type of stocks. So I’ve harped on about this, and I’m not the only technical guy that has done so, but I wanted to, today, take a look at some of the sectors that are kind of illustrating this fact and how we should play the market for at least the next few months. Because for those who follow seasonality, seasonality is a tendency, it’s not an absolute, but on average, seasonality tends to be a little weaker between July and the end of October. This is kind of the hotspot for the market. If it’s going to have lousy performance, typically it happens now to the end of October. So in addition to that, from a volatility point of view, many of you might be aware of the VIX. The VIX, also known as the Volatility Index, simply measures options premiums. When the VIX gets too low, that’s a sign of complacency. And again, if you look at some of my blogs recently, you’ll see that I’ve talked extensively about how low the VIX is. In fact, my trigger level, not like college kid trigger level who, here’s a sentence they don’t like.

I mean, my trigger level for a sell on the market is around 12 or below on the VIX. So that means that people are too complacent, too happy, too comfortable with the market, and that’s a bad thing. The options premiums are super low. That’s why the VIX gets low because everybody thinks there’s not going to be a lot of volatility. And of course, when everybody thinks there’s going to be no volatility, we suddenly get a leap in volatility. And in fact, if you look at the month of July, for example, VIX often is coming in low. According to Thackray’s Guide, historically about 76, I think he said, around three quarters of the time, the VIX rises over July, and in fact, it rises by some 30 odd percent. So given everything that we’ve seen, given the fact that the VIX is extremely low right now, and given the seasonality can often be very dicey, we want to take a look at these sectors and make sure that we are positioned correctly and maybe not positioned in the stuff that’s going to be most vulnerable.

So let’s take a loo


k at the sectors and I will share screen as usual. I’ve just got the basic sectors right here. Now, I’m going to start off with the S&P 500 and I want you to kind of get a look at this index and it will tell you more than I can possibly tell you what’s happened on the S&P versus virtually all of the indexes for these sectors that we’re about to look at. So the S&P was in a downtrend over 2022, peaked early 21, has based and then broke out. In fact, that’s a nice triangle. So from the basic technical analysis perspective, if you’ve taken my course, if you’ve read my books in particular “Sideways”, you would know that a breakout is very important for the market after a downtrend. And that’s what we’ve had.

In fact, we’ve got all the conditions here on the S&P that we should be raging bulls right now. Everything looks perfect. We’ve got a perfect breakout. It moved above the 200-day moving average. We’ve got money flow moving up. So money’s moving into the market or is it? So let’s take a look at some of the sectors to see if the market is actually going up or is it just the S&P? We’re going to look at sector ETFs one by one on the S&P. I’ll kind of whip through these because I think you’ll probably find that all, but a couple of them look more or less the same and that is sideways with no breakout.

Here’s the biotech sector. Now, biotech, they’re risky stocks and they’re actually usually a big part of that sort of high risk NASDAQ sort of stuff that typically offers the risk and return. Well, you can see the biotech sector has been pancake flat moving up and down between, let’s call it 75 to 90. Good trading sector, good trading ETF, but not so much for someone who wanted to buy and hold or was looking for that powerful breakout that we saw in the S&P. Here’s another one, global healthcare. Well by Jiminy it kind of looks the same. Not at the bottom of its range, but very sideways. This is a sideways-looking chart if there ever was one. I won’t read the prices. You don’t need to know. You can look for yourself and see that this sector’s going nowhere, much like biotech. Onto a new sector, materials.

It’s kind of looking the same as the last two charts. Sideways, going nowhere, absolutely defined lid, it’s not going through it. You’re going to get this picture in your mind soon. Now, wait, communication sector, there’s one that’s not technology. That’s not a technology sector, is it? And it’s going up. Look, Keith, you’re wrong. It’s not just the seven stocks that are driving the market, the tech stocks that are involved with AI. These are communication stocks like AT&T and stuff. Well, really, let’s take a look at a heat map of the communication sector and this is based on market cap on the capitalization of this ETF. By Jiminy, it looks to me like somewhere very close to half of that ETF, probably about 30 odd percent, pushing 40% are in good old Google. Google one and Google two.

Those are two of the leading stocks that are pushing the crazy seven. So what else? Meta. That’s another one of these stocks that has been pushing within that seven stocks that I always talk about for the S&P and the NASDAQ to move so hard. So really, yeah, there’s Verizon and there’s AT&T and other such companies. There’s even BC, a Canadian company, in that ETF, but really what you’re looking at is same old story as we’ve seen in the NASDAQ and the S&P. So don’t let this one fool you. The index communications stocks, the ETF is pretty overweight in the same stuff that’s moving the S&P and the NASDAQ. So again, thin market.

Okay, let’s go back. So we’ve looked at a number of sectors that were going sideways and the story continues. This is energy, sideways. It is near the bottom of its trading range. I think it’s a good trading opportunity for those who want to play the swing to the top of the range, but it’s most certainly not broken out. Again, you notice a consistent pattern here. Financial service sector, well, sideways. We’re playing this game over and over again that we are seeing that virtually everything is consolidating and moving dead flat, except those sectors that have the high tech stocks, the AI orientated stocks. Well that’s, again, not a healthy broad market, but let’s continue our journey because maybe we’ll come up with some. Here’s one that I covered in a blog recently and I called the blog “Industrials May Lead the Bull Market.”

You can see of all the stocks charts that I’m going to show you today, this is the one that hasn’t been overbought, hasn’t been parabolic, and isn’t a thinly overweight sector in those seven stocks that I am so concerned about. So you can see the industrial sector is in fact breaking out. There is this old resistance level, it’s breaking out. Early? True. But this is very encouraging. We’re seeing this one sector, which is a very significant sector by the way, the industrials, breaking out so here’s a bit of positive news. But it was moving sideways right along with everything else up until literally the past couple of weeks. Technology. Well, what do you think? It’s done the parabolic move off that breakout. It kind of looks like the S&P, doesn’t it? For some reason, I’m throwing my tongue very firmly in my cheek when I say that. Technology right now is struggling a little bit at its 2021 highs.

Be aware of that. Also, it’s parabolic as all get out. If you guys have taken my technical analysis course, and by the way, it’s on sale until the end of July. I really, really, really, really encourage you to take the course because it’s going to teach you all this stuff. But one of my rules that I talk about, and I talked about it in my blog, is when you’ve got a market that’s too far above it’s 40 week or 200-day moving average, you’ve got an overbought market. Well, this index, this is the technology sector index ETF, is $173 and the 200-day is $141, so that’s well over 10%. That’s my rule. We’re looking at about 30 points on a 140 index. So we’re talking probably 25, 30% over it’s 200-day. So that’s a problem because really as soon as you get much past 15, you’re in a very overbought situation.

It happened here and it wasn’t nearly as extensive. So there’s a problem with technology. Not only is it hitting resistance, it’s crazy overbought, parabolic, name all the acronyms you can think of. There’s a problem with the technology sector and you and I know it’s driven by just a few stocks within that sector. Consumer staples, again, great trading stock. In fact, we’re doing this trade. I always have to disclose what we own. We bought this recently. Why? Because we think it’s moving from here to here, short term trade, pretty safe place to be for the summer, but very, very sideways. Are you starting to get a picture here that this market is all about just a few stocks. Real estate. There’s the market meltdown. There’s the movement after sideways doing nothing, underperforming. Utilities. Same thing over and over and over.

We are seeing this pattern where the major sectors of the S&P 500 are going absolutely nowhere. Great trading opportunities. Buy them here, sell them there, whatever. We’re actually in utilities as well. We’re just doing this trade. We’re not in it for the long run. We don’t own this particular ETF, but that’s beside the point. We think it’s a trade. We’re not excited to make a lot of money. We don’t know if it’ll break out. Kind of doubted at this point, but we do think it might move up a bit. So what I’m trying to show you here is that the pattern, the vast majority of the major sectors, and these are the major components of the S&P 500, are flat. They’re not going up. So the S&P fools you. It makes it look like it’s a bull market.

It’s not a bull market unless you’ve got more than just a few stocks, a handful of stocks moving up. Healthcare, another major sector. Do I need to tell you? This is sideways. So again, great trading opportunities if you can catch these things on the bottom and sell them near the top. But do you want to hold this at this point with a long-term perspective? Probably not unless it breaks out. And again, is this contributing to the S&P 500s massive move, massive breakout, so-called bull market look. I think you’d agree with me, it’s not. Everything we looked at with the exception of technology and communications so far is not contributing to the S&P’s massive move and bull market look. Even industrials, which is the only chart so far of the rest that I like right now, did not contribute to the S&P 500 breakout.

It’s just doing its own thing and it’s just starting a bit of a breakout. The health of this market, would you agree, is maybe a little questionable. So as we come into the more volatile time of the year, you have got to keep this in mind. Here’s one other sector that may just have some life in it and funny enough, it is not at all driven by the major tech stocks. It has Amazon in it, but that’s not overly involved and it’s not really a tech stocks. It’s really a consumer oriented stock. So this is the consumer discretionary sector, and it is showing some life. It’s had some pretty big moves lately. It’s coming into a pretty significant level of resistance, but you can see it’s trying to break out. Now this is really early and I don’t know that I’d be buying this sector right now.

In fact, I don’t own any of it, but this is one to keep an eye on anyways. We’ll see. It may just fail here and move back into the range, but this is probably one other sector that’s showing some life and doesn’t have any of those seven crazy stocks that I keep talking about, like Google, Meta, Nvidia, all them, Facebook, et cetera. So let’s talk about the next sector. This is oil and gas exploration related to the energy sector, but it’s exploration. Another major sector sideways. Absolutely not contributing to the S&P 500 breakput. So we go back to the S&P. You’ve just seen a whole bunch of sideways charts and the only ones that were actually moving in the same pattern, the parabolic move that the S&P has seen are the ones that have a heavy concentration in at least a few of those seven dirty stocks.

The conclusion I might offer you is that this market is vulnerable if those few stocks decide to slow off a bit. As we come into July, as I mentioned at the beginning of the show, we’ve got a tendency for the VIX to move up because volatility increases. We’ve got a seasonal tendency for markets to be a little weaker than their balance of the year months. So there’s a lot of if’s in this market and then you have virtually every sector except for those that hold the seven stocks that I always moan about.

All those sectors, those significant sectors of major companies like Caterpillar and whatnot are not moving. So this is a problem when you’ve got such a concentrated market. And today I hope this video really illustrated to you that this market is in fact a one trick pony. So thanks for watching and I’ll be back as Arnold Schwarzenegger likes to say, I’ll be back. I’ll be back with another video next week.


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