Every week, we compare and rank ETF's using the RSMK indicator (named after it's creator Markos Katsanos). We watch for patterns of increasing or decreasing relative strength. The relative strength trend across various timeframes is something we find particularly useful as trend following traders with a "weeks to months" time horizon favored by the Chaikin Analytics model. We use relative strength when evaluating the soundness of the price trend of a stock. Look at the AAXJ, an exchange traded fund that tracks the performance of Asian markets outside Japan. This security had been showing persistent strength, ranking near the top of our global macro ETF comparison chart until it began losing steam a couple of months ago. It's relative strength trend slowed before its price trend slowed-- signaling to us at the time that a period of consolidation or, worse yet, price mean reversion was ahead. In fact, the moving average tracking we incorporate on the right side of our comparison charts confirms bearishness now in two of the three time frames we pay attention to (including the 20 day exponential moving average having crossed below the 50 period exponential moving average) . Relative strength analysis gives us an idea of "where the puck is going." We want to enter areas of the market that are not only outperforming but where price performance is accelerating on a relative basis. As I write this, the AAXJ seems to have completed its intermediate pullback, and while price is still struggling below its 50 day moving average, it's relative strength rank improved week over week. We'll watch for weekly relative strength gains to take AAXJ above the SPY, and we'll likely purchase a top Asian country ETF once price retakes the 50 day moving average.
Global ETF Snapshot - Bullish WorlD-wide Reits
OUTPERFORM other macro ETFs Despite Yield Spike
RSMK calculates the strength of a security relative to another security or index and can be used to analyze intermarket relationships. We use SPY, the ETF that tracks the top 500 US stocks, as our comparative benchmark. Our comparison charts don't show actual RSMK scores, but rather the RSMK-based rank of every security relative to SPY, trended over time. In baseball, a player under consideration for a big contract because of his impressive career statistical snapshot would be a perfect candidate for this type of relative strength trend analysis. We'd be on the lookout relative performance that may have leveled off or even cooled. Stack ranking players and trending their ability to deliver in key statistical areas would be vital before big checks to free agent athletes. That's the mindset we should have as traders and why this type of analysis is so important.
In addition to finding bullish rated stocks in uptrends, we increase our odds of success by selecting securities that are part of indexes, sectors or industry groups that are both outperforming and accelerating in relative strength. Copper, for example, has been a huge high flyer in the commodity rally of recent months, and price action continues to show bullishness. Commodities have grabbed the headlines and copper still trading above it's 50 day moving average. Plus, the short, intermediate and longer term moving average relationships are all bullish. But in the last three weeks, we've seen the first early warning sign of a relative strength slow down. The second early warning sign came just days ago when price put in a lower high. Nothing in our analysis tells us sell, but it is telling us to be cautious. As traders with a 3 to 6 month time horizon, relative strength changes that fall within our emphasis zone of 60 to 120 day lookbacks, would be key to our style of buying and selling.
Meanwhile, gold miners (GDX) have traded right up to their 50 day moving average from below, but the move has accompanied by an impressive gain in relative strength rank. Our analysis isn't telling to load the wagon until the mule goes blind, but improvements in both Chaikin Money flow and relative strength suggest the possibility that GDX will take back its 50 day moving average and resume an uptrend that's been on pause for the past six months.
In addition to finding bullish rated stocks in uptrends, we increase our odds of success by selecting securities that are part of indexes, sectors or industry groups that are both outperforming and accelerating in relative strength. Copper, for example, has been a huge high flyer in the commodity rally of recent months, and price action continues to show bullishness. Commodities have grabbed the headlines and copper still trading above it's 50 day moving average. Plus, the short, intermediate and longer term moving average relationships are all bullish. But in the last three weeks, we've seen the first early warning sign of a relative strength slow down. The second early warning sign came just days ago when price put in a lower high. Nothing in our analysis tells us sell, but it is telling us to be cautious. As traders with a 3 to 6 month time horizon, relative strength changes that fall within our emphasis zone of 60 to 120 day lookbacks, would be key to our style of buying and selling.
Meanwhile, gold miners (GDX) have traded right up to their 50 day moving average from below, but the move has accompanied by an impressive gain in relative strength rank. Our analysis isn't telling to load the wagon until the mule goes blind, but improvements in both Chaikin Money flow and relative strength suggest the possibility that GDX will take back its 50 day moving average and resume an uptrend that's been on pause for the past six months.
Commodities, Currencies and Metals ETF SNAPSHOT - Equity ETFs Finally outpeform most commodity ETF's, Copper, Energy & AG Pause, PRECIOUS Metals Finally show some signs of life. Resourced-based country currencies (Aussie Dollar) show strength
Methodical, consistent relative strength analysis helps correct erroneous assumptions. The old expression "don't trade what you think, trade what you see" is especially important when the market is being flooded with $1.9 trillion in debt-fueled stimulus, but interest rates are starting to become attractive to yield-seeking bond investors. My first reaction to Real Estate rotating steadily to the top of the World and US Sector ETF stack was "Huh? But interest rates on Treasuries are spiking!" But, a look further under the hood shows the market is betting on the return of the hotel and hospitality business and the Dow Hotel and Lodging Reit, a significant industry group component, had climbed up 9 points over a five day period. The tech downturn, on the other hand, is one we've seen coming for months. The XLK lagged for weeks before tech prices broke trend and the 50 day moving average. Now the question is does the Nasdaq lead the rest of the market lower or do financial-heavy small caps lead the market higher? There's no flight to safety in TLT yet, but utilities, staples and reits are occupying the top half of the relative strength chart for the first time in months and months. We can't deny that the US market is a bit defensive.
US Sector Rotation: Consumer discretionary pops as The first stimulus check drops. but what's with the rotation into Real Estate with Interest rates soaring? XLU JOINS XLRE Rotation In a tepid sign of defensiveness. Even XLP maintains its middle of the pack rank.
US Subsectors and industry Groups
We thought they'd be permanent top 10 subsectors, but the landlord gave the boot to Innovative Tech, Semis, Info Tech, & Software and Service ahead of the recent tech technical breakdown. With Transports and Aerospace moving into the top 10, Industrials appear on solid ground. As do Consumer Discretionary (Retail, Home Builders) and Financials (big and regional banks, insurance and capital markets (think brokers). Reits as a subsector of Real Estate also in the top ten. This stack rank would suggest that institutions (that are the market) are not hedging defensively, but rather simply selling what's run up to excess to make room for stuff that still has room to run. No panic button in our market assumptions.
We're reminded that 45% of of the market-cap weight of the All Country World Index (ACWI) is occupied by companies listed outside the of the United States. While the US market may be the biggest game in the world, we're certainly not the only game. Chile, Canada, Mexico and Brazil are showing positive relative strength vs. SPY in this hemisphere. They are joined by handful of Eurozone economies and Japan.
InTERNATIONAL: EUROZONE, JAPAN & LATIN AMERICAN
COUNTRIES OUTPERFORM SPY AND ACWI
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