As long as you were positioned in a few select healthcare stocks, Tuesday was a pretty good day. Names like Allergan (AGN), Becton Dickinson (BDX) and Actavis (ACT) did a decent job of maintaining and building on recent gains. Unfortunately, if you were positioned long in nearly anything other than these names, you probably didn't have a banner day.
As far as specific sectors are concerned, the most aggressive and unrelenting selling continues to be seen in the First Trust ISE- Revere Natural Gas ETF (FCG), SPDR S&P Oil & Gas Exploration & Production ETF (XOP), SPDR S&P Metals and Mining ETF (XME) and Market Vectors Gold Miners ETF (GDX). An easier way to think about this would be to view any company that extracts any type of natural resource from the ground as untouchable.
The selling in gold and silver miners, as well as offshore drillers, isn't a new phenomenon. But I wonder how many traders realize stocks like QEP Resources (QEP), Newfield Exploration (NFX) and Apache (APA) have been absolutely crushed over the past few weeks. These are all names that were trading at or near two-year highs roughly a month ago. Coincidentally, QEP, APA and NFX are three of the highest weighted components of the FCG.
As an aside, I should mention each of the three aforementioned energy stocks are on my short list for bounce candidates once the sector-wide selling begins to ease. Newfield is of particular interest to me on the long side, perhaps against a stop-loss of roughly $30-$32. We'll likely revisit these names and review their charts in the not too distant future.
Away from energy and mining, another big focus for me has been the Industrial Select Sector SPDR ETF (XLI). The approximately flat year-to-date performance of the XLI fails to tell the whole story. If you restrict your view to industrials focused on the aerospace/defense, railroading, waste management or airlines, things don't look all that bad. However, if you dig deeper and review the industrials focused on industrial equipment, farm and construction machinery and diversified machinery, you'll find some pretty stunning year-to-date loses.
To make things clearer, stocks like Southwest Airlines (LUV), Delta (DAL), Union Pacific (UNP) and Norfolk Southern (NSC) are up between 18% and 71% year-to-date. On the flip side, you've got names like Fluor (FLR), Pentair (PNR), Eaton (ETN) and Flowserve (FLS) trading lower by between 15% and 20%.
I hesitate to suggest anyone should proceed with caution if holding over-weighted long positions in the strongest sub-sectors of the major industrials (airlines, rails, etc). However, given that we frequently see the strongest components (and sectors) taken out back and shot before broad market corrections come to an end, I would indeed proceed with extreme caution.
From an index point of view, it remains relatively easy to point to the 20-day and 50-day simple moving average, along with the Relative Strength Index (RSI) and state unequivocally that there's little reason to be leaning aggressively bullish. As we saw in Tuesday's Trader Daily, every major market ETF, include the SPDR Dow Jones Industrial Average (DIA) as of Tuesday's close, is closing beneath its respective 50-day moving average. Additionally, each ETF's RSI is trading convincingly beneath the 50-center line. Simply put, the intermediate timeframe trend remains bearish.
If we incorporate bonds into the picture, we continue to see weakness in high yield, especially when compared against higher duration.
The chart above makes it all to clear how persistent the selling has been over the past ten months in riskier, higher-yielding bonds, in favor of safer, higher-duration bonds. What's concerning from an equity side, is that up until 2014, the S&P 500 moved in relatively close correlation to the JNK:TLT ratio. Put another way, when traders were unloading high-yield bonds, they were also selling stocks. And they weren't only selling small caps.
- Please check columnist conversation prior to Wednesday's open for an updated E-Mini S&P 500 Futures (Es) volume profile and trade plan.
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at email@example.com or posted to my twitter feed @ByrneRWS.