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Technical Tuesday - Welcome to “Day 6” of the Market’s Strongest 90 Days

By Chris Rowe January 10, 2023 Facebook Logo Twitter Logo Email Logo LinkedIn Logo

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THE strongest quarter of the 16-quarter (4-year) Presidential election cycle is upon us.

This historical, seasonal pattern is so reliable that I’ve kind of made it my mission to make sure YOU don’t forget about it. 

In the image below, I’ve circled “1Q” and “Year 3” (the pre-election year… the year we’re in right now)...

(Click any image to enlarge)

As you can see, this quarter typically gains 6.9% over the 90-day span of time.

Well, today is “Day 6” of that 90-day span, and we’ve just been handed the winning lottery numbers.

I mean that, yesterday (Monday’s) price action was very telling. And it told us what the market as a whole wants to do over the intermediate term.

(If you’ve been following my YouTube channel – @ChrisRoweTrader – you know that I post a video every Tuesday along with Bill Spencer and Costas Bocelli. We do our show on Tuesday precisely because Monday’s price action reveals so much (which is something not many investors are aware of).

You can watch today’s video here.

This is a new year. You’ve probably made some resolutions. 

Here’s a resolution I want you to make – and keep.

From now on, whenever someone asks, “what’s the market doing” you will NOT quote the Dow Jones at them. You won’t quote the S&P 500.  Instead, you’ll give them useful information.  

You’ll tell them whether the market is strong or weak.  The term used by the pros in the market is “risk-on” or “risk-off.”  

Just stating how many points the Dow has gained or lost is… well… frankly it’s mindless and pointless.  It doesn’t convey anything except that it’s likely the person giving that answer doesn’t understand much about the stock market. 

The good news is that it only takes a tiny bit of effort to have a real answer.  

It’s not important whether the recipient of the answer “gets it” or not.  I only care about you.  

And if you were willing to spend all those years in school and then more years learning “your trade” then you can spend a few minutes learning a simple (not to be confused with mindless) method to truly understand what the stock market is telling you.  

The key is to focus on which sectors are performing the best (or worst).

The stock market tells you things.  It speaks to you through price-behavior.  Intimidated yet?

Don’t be. We’re going to keep it simple. 

You probably know you can buy a diversified “basket of stocks” such as mutual funds or ETFs (exchange traded funds).  

There are different types of funds but today we’ll be using “sector funds” to hear what the stock market is trying to tell us.  

The price behavior of certain sectors tends to speak volumes.  For example, the price behavior of semiconductor ETFs can be very telling.  

Generally speaking (of course every day brings a slightly different scenario so it’s best to think of this as an art and not a science), if semiconductor ETFs are experiencing much stronger price behavior than all other sector ETFs, the market is telling you it wants to go higher. 

If you didn’t know that, then pause here to pat yourself on the back because you’re officially lightyears ahead of the person whose only insight is, “the Dow is up 500 points today.”

Because not all up days are created equal.  Some up days are quite questionable.  You can’t just go by whether a general market average is up or down. 

What if the Dow Jones is up, big time, but you notice semiconductor ETFs are actually the weakest group?   

Well then you’d better take a closer look at what’s happening because semiconductors is a “risk-on” sector.  If it’s relatively strong then it’s risk-on, which is like saying “GAME-ON” for bullish investors.  

What’s today’s market telling us?

It’s “Risk On”

Here are the 11 S&P sector ETFs, arranged from best to worst, based on yesterday’s performance.

The blue sectors are three of the top four strongest performers, and they all have something in common.

They are all “Risk on” sectors. That means they do well when investors feel bullish and are confident the market is headed higher (and also usually that the economy is set to improve).

Consumer Discretionary refers to things people want but don’t need. Luxury items and meals at nice restaurants.

Technology tends to be volatile, but that’s because the sector is filled with smaller companies working on innovative new products. Those are the kinds of stocks that can triple or quadruple quickly. Investors don’t invest in stocks like that if they’re scared or bearish.

Materials do well when investors and entrepreneurs are looking to build houses and factories – again, “risk on.”

We’re going to drill down into the sector that did best yesterday – Technology. That’s because one ETF from a sub-sector of Technology – Semiconductors – outperformed even the strongest sector ETF on that list.

A quick note first…

We’re not going to talk much about the red sector ETFs at the bottom of the list. I only show them because they confirm the risk on posture we’re seeing in the market.

Consumer Staples – things like soap and toothpaste – tend to do well even when investors are fearful. The same goes for Healthcare. They are the so-called “defensive” or “risk off” sectors.

So it’s very telling that both of those “risk off” sectors were the very worst performers yesterday, a day when we saw the risk on sectors outperform.

This One ETF Tells the Whole Story

The broader Technology sector contains a number of sub-sectors.

Yesterday, the VanEck Semiconductor ETF (SMH) gained a whopping +2.18%.

What’s more, it gained on very heavy volume. This tells us that the up-move isn’t the result of bears (sellers) getting out of the way to see how high the bulls are willing to drive the price (before the bears step in and sell). It means the bulls have conviction and we can consider the move to be valid.

And it’s further confirmation that the strength in this sector is real.

I didn’t cherry-pick that particular ETF by the way. There’s more…

The SPDR S&P Semiconductor ETF (XSD) gained +2.42% (on below average volume).

The iShares Semiconductor ETF (SOXX) gained +1.84% on the day, also on heavy volume.

And the Invesco Dynamic Semiconductors ETF (PSI) gained +2.01% on heavy volume..

It bears repeating: “The stock market can talk to you – it can tell you things – but only if you follow the sectors.

Write it down… Learn it… Live it.

Enjoy the next 84 days! 

Chris Rowe

Founder and CEO, True Market Insiders

 

 

 

 

“You see it in the price before you see it in the news.”

 

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