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Stuck in a Heavy Rotation

Every time we’re at the edge of the cliff, ready to really correct, we just rotate groups.

The Market

For over a week now the S&P 500 has rallied, and it has essentially regained that which it lost in late January. Yet, breadth has lagged. That also means my indicators have lagged.

The McClellan Summation Index, for example, has not been able to turn up in this rally. In a typical market environment, this would matter quite a bit. By that I mean when it takes that long for the indicators to get in position to turn up, it usually means we’re set up for another push down. Yet that’s not what this market has done.

What this market has done is every single time it is on the cliff, ready to give us a proper correction that will make the indicators line up well, we just rotate groups.

So, Tuesday, we rotated into value. Every time we rotate into value from growth, it is short lived. Last week, it was a one-day wonder.

And then after that one-day wonder, folks are right back to buying the same old Fab Five tech stocks. And once they do that, the indicators sag again, but the indexes rise. This has become a vicious circle in the market. It’s as if the market is not allowed to correct properly, but only through group rotation. Quite frankly that type of environment has rendered my indicators essentially useless.

Breadth was good today. But all it did was get the Summation Index to stop going down. It needs yet another day of good breadth to get it to turn up. It was in the same place a week ago and it didn’t work. So, do we trust it when it turns up after a nearly 5% rally in the S&P?

And sure, that pattern I drew I in for iShares Russell 2000 Index (IWM) - Get Free Report played out as it rallied, came down and rallied again, but it couldn’t get through $168. Just look at the chart. What progress has it made? It is the same place it was in late December. That’s why the only stocks that have seemed to work are the handful of tech stocks, because everything else looks more like IWM with up and down patterns if they have held up and gone nowhere or with down patterns in the case of industrials and oils.

Speaking of oils, I would love to see some follow through in the Energy Select Sector SPDR (XLE) - Get Free Report, but let’s say even I am skeptical.

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New Ideas

I am going to take us back to the chart of Cummins (CMI) - Get Free Report that we looked at several times a few weeks ago. It’s not just CMI, but this is representative of what needs to change in the market. Unless and until stocks like this start crossing those downtrend lines, these value-over-growth days are going to be one (or a few) day wonders.

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I liked iShares Expanded Tech-Software (IGV) - Get Free Report, an exchange-traded fund for software stocks, a few months ago, and when it got to $250, I thought it had had enough. Clearly, I was wrong because it was just a resting spot. But notice that it tried to get over that spike high from a week ago and couldn’t do so Tuesday. I think even if it comes down it will find support at that line but this is something to watch.

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Today’s Indicator

The McClellan Summation Index's chart is below:

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Q&A/Reader’s Feedback

Helene welcomes your questions about Top Stocks and her charting strategy and techniques. Please send an email directly to Helene with your questions. However, please remember that TheStreet.com Top Stocks is not intended to provide personalized investment advice. Email Helene here.

I am not quite ready to warm up to Survey Monkey (SVMK:Nasdaq) again yet. One reason is that, as you can see from the pattern prior to November’s decline, it has a tendency to go sideways for a while before it makes a move. I think I would prefer to wait for that set up again. Survey Monkey is slated to report earnings Wednesday.

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I look at the chart of Xilinx (XLNX:Nasdaq) and at this point, I think the best it can do is fill that gap at $95. The stock has spent the last year gapping down (see April) and filling the gap (see July) before heading down again. It did the same in September and January. Until that pattern changes, I’m inclined to think the gap fill sends it back down.

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United Parcel Service (UPS) - Get Free Report has filled the gap and is trying to form a small enough base to rally. That top has a target that measures near $100, so it’s probably close to starting to form a base in here. I think it’s just early. There is much work to be done.

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