Weekly Chart Review

And a new sector review look...

Last week, we examined the following chart and noted that for the current market rally to continue, we need to see the S&P 500 clear the symmetrical triangle to the high side.

Instead, what we got last week was a repeat of the previous week where the S&P 500 popped above the symmetrical triangle intra-week, only to fade by the end of the week and close inside the symmetrical triangle.

During the week beginning April 10th, at one point, the S&P 500 was up 1.42% only to close the week up 0.79%. This means the market lost effectively half of its intra-week gains by the end of the week.

Last week, at one point, the market was up 0.77% only to close the week down -0.10%. Therefore, the market turned what could have been a healthy gain for the week into a modest loss for the week.

This is not a strong look if you’re a bull.

Do we have a new trend?

I’ve said a number of times in previous posts, I find value in using the Heikin-Ashi charts to establish trends.

If we flip the chart above from weekly to daily and from a bar chart to a Heikin-Ashi chart, we see what appears to be the beginning of a new downtrend.

Only time will tell if this downtrend continues to play out but my “four yellow caution flags” from last week’s post appear to be starting to play out.

Sector Review

I’m going to use a different display for our sector review this week. I think this will prove beneficial as it will allow us to look at all of the sectors at the same time and from two different views: absolute and relative. Feel free to let me know what you think about the new view.

I have plotted each of the values (both for the absolute value and relative value charts) on a standard deviation spectrum.

As a quick refresher, here is what Investopedia says regarding standard deviations:

“Standard deviation is a statistic that measures the dispersion of a dataset relative to its mean and is calculated as the square root of the variance. The standard deviation is calculated as the square root of variance by determining each data point's deviation relative to the mean.

If the data points are further from the mean, there is a higher deviation within the data set; thus, the more spread out the data, the higher the standard deviation.”

The mean in each of the charts is denoted as “μ” and each standard deviation is denoted as “σ”. Therefore, one standard deviation would be +/-1σ and so on.

Also, recall from statistics, for a normal distribution, one standard deviation encompasses approximately 68.3% of the observations, two standard deviations encompass approximately 95.4% of the observations, and three standard deviations encompass approximately 99.7% of the observations as shown in the graphic below.

Let’s start with the “absolute value” chart. By absolute value, I simply mean we are looking at the actual closing price from Friday and comparing that value to all of the closing price values over the last year.

If Friday’s closing price had been exactly equal to the average closing price over the last year, the vertical bar would have been plotted exactly on the mean (μ) line.

When we look at the chart below, we find that the S&P 500 and four of the sectors (Communication Services, Industrials, Technology, and Consumer Staples) all have values above one standard deviation (+1σ).

Further, Materials, Energy, and Health Care are all extremely close to crossing over the +1σ threshold. This means that the S&P 500 and 7 of the 11 sectors each have “high” values relative to the last year’s worth of prices.

This doesn’t mean that these prices can’t go higher; however, what we typically find is that once prices find their way into being “overbought” (i.e., somewhere above +1σ), this is often where we see prices begin to reverse and head lower. The opposite is also true when we see values less than -1σ.

This would also tie to what I’ve shown in the first two charts in this post. There’s simply “more room” lower than there is higher all else being equal.

Now we will turn to the “relative value” chart. Here we’re using the same methodology as above but we’re looking at each of the sectors relative to the S&P 500.

Using this methodology, we would want to lighten up on sectors “in the red” and add to the sectors “in the green”. It is important to note that one needs to take into consideration both the “absolute” and “relative” value charts before making a decision.

Currently, the absolute chart is suggesting that roughly 2/3rds of the sectors and the S&P 500 are “overvalued” and should theoretically move lower in the short-to-medium term. Whereas, the relative chart is suggesting that if you have to remain invested, the sectors “in the green” are most likely to outperform the S&P 500 on a relative basis over the short-to-medium term while the sectors “in the red” are most likely to underperform the S&P 500 on a relative basis over the short-to-medium term. Sectors “in the yellow” could go either way.

Summary

While there are no guarantees of anything, especially when it comes to investing, we are always seeking to put the probabilities in our favor and hopefully, these standard deviation charts will aid in that endeavor. Let’s make it a great week!

Until next time…