By: Chris Rowe — January 14, 2020
This is a sector relative strength matrix.
It's telling us that the major Technology sector has just gone from great to explosively great. I'll tell you why in a minute.
(Click any image to enlarge)
*Symbol legend at the bottom of this article*
To really appreciate the power of the sector relative strength matrix, you need a few layers of understanding.
This is because instead of being a squiggly line, the chart consists of columns (consisting either of Xs, for up, or of Os for down).. Nothing is left to interpretation. If the relative strength chart of sector-A versus sector-B is in an X-column (an up column) then in the shorter-term, sector-A is stronger..If the chart is on a "buy signal" then in the longer-term, sector-A is stronger..So columns speak to the shorter-term and buy/sell signals speak to the longer-term..
The sector RS matrix is so powerful because it's a 3-D view of the stock market.
Instead of comparing a sector like the Software sector to the stock market, the matrix compares it to each and every other sector, one-by-one.
There are 45 sectors in this matrix.
Each of the 45 groups of stocks has its own equally weighted sector index and each sector index (a basket of stocks in the same sector) is compared to each and every other sector index.
Behind the scenes, instead of displaying 2,025 charts, the matrix just has either B or S (buy or sell signal) or Xs (as opposed to Os).
The matrix, above, shows Software currently ranked #1. It's in the top right corner under "SOFT".
You'll see to the right of the symbols, in the "buys" column, is the number 43. This tells us that our Software sector index is on a relative strength buy-signal when compared to 43 of the 45 sectors... and on a sell signal compared to two of them.
Look at the yellow circles. Specifically, you can see that the Biotech (BIOM) and the Energy Other (ENER) sectors are the only sectors against which Software is on a sell signal when looked at on a relative strength chart.
Next to that 43, in the third column, "Xs", you see a number 45. This is because all 45 sector-to-sector relative strength charts (Software vs. whatever) are in X columns.
In other words, Software is showing long-term relative strength verses 43 other sectors and short-term relative strength verses 45 other sectors.
Its ranking is based on the number of "buy signals" (43).
Now that we are experts in sector-sector relative strength, take another look at the matrix:
Full Disclosure: I have been fibbing you this entire time. These are not sectors, strictly speaking. They are "sub-sectors". But I wanted to keep it simple for you.
We go by Standard and Poors major sector categorization where there are 11 major sectors, with one of them (the strongest one, by far) being the Technology sector.
There are four sub-sectors that make up the major Technology sector.
And the matrix changes daily. I'll keep this article short and refrain from diving deep into the ranking history (which we also track and chart in our Sector Prophets Pro platform).
But suffice it to say that each of the four sub-sectors recently experienced a sharp jump up the rankings. And just like the price of a stock or a stock index, relative strength does trend.
So the fact that the rankings have been moving up is quite significant.
We can see, in detail, how the major Technology sector has just experienced major price acceleration compared to the other groups.
I can write another ten articles about the implications of this intel. But here's the summary:
If you are short-term bullish on the stock market, these are sectors you want to be in.
No matter what the stock market does, just know that institutions are buying these sectors in a big way - quickly and with little regard for whether they are pushing the prices higher. They continue to pay up for them and they do this, of course, under the assumption that they'll eventually be valued much higher.
Stop and really think about that, and what it means when the price of one sector is outperforming the price advances of other sectors. It's just what I described.
Big buyers (the ones with so much investment capital that their buying pressure is moving entire sectors higher, quickly), are so bullish on these sectors over the long-haul that they keep buying even though the prices are advancing at the fastest pace of all sub-sectors.
I've been saying the stock market is overbought and due for a dip. I'm talking about the general stock market. This does not mean to sell all your stocks by any stretch.
But the one and ONLY WAY to view the stock market is for what it truly is: A bunch of smaller groups of stocks, called sectors, that each have their own agenda and personality - especially near intermediate-term or long-term market tops.
If you want more guidance on what to do at this point, you can read my December 30th. article "This Market is Overbought - Here's How to Play It".
PS: Here's a symbol legend for the symbols shown. It generally makes sense to be bullish on sectors that are in the top 25% - 33% (11 - 15) ranked sectors.
SOFT - Software
ENER - Energy Other (alt energy)
INET - Internet
CHIN - China
SEMI - Semiconductors
POLL - Pollution Control
OILS - Oil Service
AERO - Aerospace & Airlines
PROT - Protective and Safety Equipment
ELTR - Electronics
REST - Restaurants
COMP - Computers
HEAL - Healthcare
BUSI - Business Products & Services