Sector Screen Update

We can take a bottom-up structural sector based approach to examine whether there is 'micro' evidence of support for the major US stock indices within the current stage of market correction that has been ongoing for 2 months (since early April). We'll also have a look at the day charts of the major US averages to see if we can refute any of the thought processes we arrive at. 

When examining the condition of the stock market, we need to observe the intersection of a series of component parts; likened to observing independent pieces of a puzzle. Though, unlike a puzzle, where we can start with the end in mind and work backwards to assemble the pieces - in markets, we can't know the end with certainty (however that may relate to our investment time frame), but we critically examine the pieces, develop a working hypothesis (or image) while staying flexible enough to adapt if we have overlooked or misinterpreted aspects of our input (changing image). 

From above, we can observe a screen shot of US sector ETF's and corresponding signal types that reflect the nature of the buying or selling and the respective directional bias of each individual product. The list also takes into consideration a variety of US sector ETF products from the same group so as to observe the signal across different holdings within each ETF as issuer's do vary from to product in the ETF universe. The ETF screen shot is but one approach of gaining directional insight into the major averages.

The 2 signal types above are seen from 'IntraS' and 'CloseS' columns and offer up information on short term directional bias. Whether the bias is long vs short (green vs red colour overlay), as directional 'swing' traders or 'trend' traders and even as investors, we are looking for clues in the auction process that indicate whether urgent buying or selling is initiating a trend signal.  This urgency is revealed by the signal type 'Intra' vs 'Close' and tells us whether a directional change is momentum based (IntraS).

The sector based approach is one way that helps determine the 'state' of the major index. So, if I'm looking to take a position in the S&P500 index futures (ES), then knowing the nature and type of short term activity systematically within the context of larger structural inputs at the level of Sector group and sub-group  can greatly improve our odds of winning in the ES futures (S&P 500) as it is a composition of its sector and sub-sector parts.

I like to see urgent buying (as revealed by IntraS column above) by funds at the Sector level coming off a prolonged 8 week correction if we are to see some evidence of stabilization or rebound in the major averages. We can see a lot of bullish changes (green) in the past 3-4 trading days, evidenced above by both closing and intraday signal types.  The majority of sector products have transitioned long on closing signals, implying weak underlying transition into the long side, structurally.

The Intraday momentum signals that we are interested in has come from Healthcare, Biotech, Internet Index, Industrials, Materials, Gold, Silver, Oil Equipment and Services sectors. We are not seeing momentum breadth into real economy sector based ETF's (Home Builders, Financials, REIT's, Retail).