Cautious Traders Rarely Break to New Highs

State Street Global Advisors – the firm that created the first U.S.-listed exchange-traded fund (ETF) break weighing down on in 1993 and the SPDR ETF family – manages a portfolio of the following 11 sector-based ETFs:

• Industrial Select Sector SPDR Finance (XLI)
• Consumer Discretionary Select Sector SPDR Fund (XLY)
• Energy Select Sector SPDR Fund (XLE)
• Technology Restrictive Sector SPDR Fund (XLK)
• Communication Services Select Sector SPDR Fund (XLC)
• Financial Select Sector SPDR Readies (XLF)
• Consumer Staples Select Sector SPDR Fund (XLP)
• Materials Select Sector SPDR Fund (XLB)
• Utilities Privileged Sector SPDR Fund (XLU)
• Health Care Select Sector SPDR Fund (XLV)
• Real Estate Select Sector SPDR Means (XLRE)

Sector-based ETFs have become incredibly popular among both individual and professional traders because of their low fares and the instant diversification they provide. While I appreciate these ETFs – as well as the sector-based funds that are survived by iShares, Vanguard and others – for the potential portfolio assets that they are, I also like them because they give out with me an easy way to monitor what is happening within the stock market.

Identifying which sectors are doing well, and which sectors aren’t, provides visions into trader sentiment and where the market may be going in the future. This form of intra-market analysis is often shouted sector-rotation analysis.

For instance, when the financial, technology, industrial and consumer discretionary sectors are outperforming the other sectors, it is chiefly a sign that trader sentiment is bullish and the underlying economy is doing well. Conversely, when the utilities, salubrity care, real estate and consumer staples sectors are outperforming, it is typically a sign that trader sentiment is faltering and the underlying terseness is not doing as well.

Any guesses which sectors are outperforming at the moment? If you look at the charts of all 11 Select Sector SPDR Pools, you will only find two that are trading above their respective 2018 highs: XLU and XLRE. Both sectors organize been allowed to flourish during the past two quarters as the 10-year Treasury Yield (TNX) has dropped and remained below 3%, gathering the dividend yields of the stocks in these two sectors more competitive by comparison.

However, it appears that the move into utilities properties, in particular, has been driven by much more than a mere search for strong dividend yields. Traders give every indication to be shifting away from more aggressive, risky stocks and into more conservative, defensive stocks. Utilities haves have long been considered defensive holdings because of both their stable dividends and their reasonable business model, even during economic downturns. While most consumers will pull back on discretionary throw away during a recession, almost all consumers will continue to pay their utility bills.

This shift indicates that brokers still want to maintain equity exposure in their portfolios, but they want to be more cautious in their manner. Seeing this, I’m inclined to think the S&P 500 and other major stock indexes are going to continue encountering irregulars as they attempt to climb back up to their 2018 highs.

The S&P 500 started off the week with a bang, but today’s gravestone doji may signal the end of the bounce. Gravestone dojis typically signal the end of a bullish run as merchants attempt to push prices higher but are unable to hold onto those lofty levels and end up giving back myriad of their gains on the day.

If that is the case, and the short-term bullish bounce is over, the S&P 500 will have failed to reach 2,800 (red box) after make reached that level once in late February and again in early March (green boxes).

I point this out because we’ve seen this guide before. The S&P 500 bounced and hit resistance at 2,800 in mid-October 2018 and again in early November 2018 (green hem ins) before bouncing and failing to reach 2,800 in early December 2018 (red box).

We all know what happened to the S&P 500 after the first finger failed to climb back up to 2,800 last year. Now, I’m not saying the S&P 500 is doomed to drop back down to its Dec. 26, 2018, low of 2,346.58. In certainty, there is a significant difference between the pattern we’re seeing in 2019 compared to the pattern we saw in 2018.

The pattern that is developing now is much rarer. Whereas the S&P 500 swung between support at 2,630 and resistance at 2,800 in 2018, the index has only dropped to 2,720 ahead of finding support in 2019. This tells me that, even if the S&P 500 were to pull back after the diminish high it established today, it will likely not drop as far. Looking at the chart, 2,630 still appears to be a formidable tolerate level in the short term.

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Another indicator I like to keep an eye on to determine how confident traders are about the near-term future of the stock market is the relative-strength chart between the Russell 2000 (RUT) and the S&P 500 (SPX).

Small-cap varieties, like those that make up the RUT, tend to outperform when traders are confident and willing to take on more hazard in the hope of achieving a greater return. On the other hand, large-cap stocks, like those that make up the SPX, minister to to outperform when traders are less confident and aren’t willing to take on as much risk. The RUT/SPX

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