Tag: relative rotation graph

One hallmark of secular bull markets is rotation. When leading stocks, sectors, and industry groups falter, there needs to be others that grab the baton and help to keep the bull market intact. Semiconductors ($DJUSSC) have been the clear leader in the stock market for years, but especially since the end of October 2023, when the group embarked on its most powerful rally of the 21st century. Below is a 25-year chart of the DJUSSC. Pay particular note to the bottom panel, which reflects a 170-day rate of change (ROC), or roughly 8 months. Compare this most recent 8-month rally to other 8-month periods throughout this century:

The 8-month ROC recently hit 115%, which is the biggest rally EVER on this index. And if you look at the price chart, we should at least CONSIDER the possibility that this is a parabolic top. This is how these form – with tremendous amounts of positivity and what could end up being unsustainable revenue and EPS growth. The entire group is being priced off of record revenue and earnings growth and for perfection. Should traders even get a HINT that future growth might be lower than what we’ve been experiencing the past couple quarters, the semiconductor trade could be weak for months, possibly quarters.

In a secular bull market, however, it’s rotation that keeps our major indices in uptrends. Where might the new leadership emerge from if semiconductors do in fact weaken? Well, I think it’s already showing here:

XLC:

A breakout has already been made here. Yes, we’re a bit overbought, but nothing like how overbought technology (XLK) has been. One industry that typically revs up when the XLC is hot is internet ($DJUSNS). This group remains in the midst a major rally:

$DJUSNS:

The red-shaded area highlights the fact that, on relative basis, internet hasn’t been leading the past couple months. The breakout this week, though, might indicate renewed relative strength. It’s also noteworthy that since the financial-crisis low in 2009, internet stocks have been leaders during July, rising in 14 of the past 15 years:

The average July return has been 6.8%, more than double any other calendar month since 2009.

There’s one other key sector, consumer discretionary (XLY), that could play a big leadership role over the second half of 2024. This group has been a drag on U.S. equities, but it really hasn’t been felt that much, because the XLK has been so strong. NOW is the time, however, when U.S. equities could be looking for rotation to and leadership from this sector:

XLY:

Relative strength has begun to turn higher over the past two weeks and this relative strength could be fueled much further by an absolute breakout in the price of the XLY near the 184-185 level.

It’s been amazing what a stock like NVIDIA Corp (NVDA) has done for semiconductors, technology, and our major indices. But if NVDA struggles on a relative basis, which it certainly deserves, I see 3 critical stocks not named Apple (AAPL) and Microsoft (MSFT) that could swoop in and “save the day” for our major indices, especially the NASDAQ 100.

TAG, You’re It!

Ok, so if we’re going to need a replacement, temporary or otherwise, for a leadership stock like NVDA, which stock(s) might we look to for future leadership?

GOOGL:

Relative to its peers, GOOGL hit rock bottom in early March. Since then, GOOGL has been significantly outperforming its internet peers and is currently awaiting another one. From mid-May to mid-June, GOOGL didn’t go anywhere. Semiconductors were flying, but GOOGL took a back seat. Now that it’s latest breakout to all-time highs have occurred, it certainly appears as though GOOGL is well-prepared to take the baton for the next leg of this secular bull market.

AMZN:

I don’t know if there’s a better stock anywhere right now. AMZN is absolutely one of my favorites. Discretionary stocks have been lagging most of the year and AMZN is the top holding in the XLY. AMZN just broke out, after consolidating, on excellent volume and I expect the stock to be a leader during the 2nd half of 2024. AMZN’s best calendar month during this secular bull market (since 2013) has been July – check it out:

AMZN has climbed more often in November, but its actual average monthly performance in July (+7.3%) easily surpasses all other months. So we have technical conditions turning bullish just as we move into, arguably, AMZN’s best month.

TSLA:

Ok, I get it. TSLA’s been disappointing for sure. But there are improvements on the chart that suggest TSLA could be on the verge of a much bigger run. We do need to see one more key price level cleared to give me more confidence of a big rally:

I see rather significant improvement in momentum (PPO), volume trends, and relative strength. TSLA, relative to its auto peers, just hit nearly a 4-month high. This, combined with other technical improvements, tells me that we could just be getting started here. I do want to see gap resistance near 208 cleared, because after that, I don’t see any major resistance until 265 or so.

There’s one more thing to like. Over the past 6 years, June, July, and August have posted AMAZING average returns. This time of the year is when TSLA has really shown extreme absolute and relative strength. Check out this seasonality chart:

The average return during June, July, and August has been a STAGGERING and BLISTERING 43%!!! That’s the AVERAGE since 2019. So if TSLA is going to get the job done, history tells us that NOW is the time.

Remember, the sustainability of secular bull markets is not much different than the game we all played as kids. Hey AMZN, GOOGL, and TSLA! You’re IT!!!!

I published my first StockCharts YouTube video in quite awhile and it’s great to be back! I spent a lot of time discussing the beauty of secular bull markets and how rotation keeps them alive, providing areas to keep a close eye on for future leadership. Please be sure to check out the video HERE and also be sure to hit that “Like” button and “Subscribe” to the StockCharts YouTube channel! I’d really appreciate the support!

Happy trading!

Tom

Let’s jump right in. For me, everything starts at the TOP. I take a top-down approach to trading. And when I say “the TOP”, I mean market direction.

Step 1: Is it a Bull or Bear Market?

Listen, this is a very easy step to me. Look at a LONG-TERM chart of the S&P 500. Are prices moving UP from left to right? Or are they moving DOWN from left to right? It’s that simple. Stop trying to figure out why it’s going up or down. Don’t interject your own personal biases into it. Just look at the chart and answer the question:

I have stripped out nearly all technical indicators. There’s no volume. There are no momentum indicators like the PPO, MACD, RSI, or Stochastic. There are no moving averages. This is nothing more than a 10-year weekly price chart of the S&P 500, NASDAQ 100, and the broader NYSE. What do you see as you look across this chart from left to right? Is there a debate here? The stock market has been moving higher for YEARS (with occasional weakness)!!!! If you find yourself constantly being in cash or, worse yet, trying to short sell stocks, because YOU think stocks are overvalued, you have missed out on creating enormous personal wealth. STOP doing that!

We are heavily influenced by listening to news, whether you believe so or not. I remember my parents talking about the enormous debt of the U.S. back in the 1970s and that discussion has never ended. Meanwhile, $1 invested in the S&P 500 on January 1, 1980, is now worth $50 (prior to adjusting for inflation). So the absolute FIRST STEP in becoming a better investor/trader is to understand that your odds of making money are MUCH, MUCH BETTER on the long side than on the short side. Shorting stocks should be considered very infrequently and only when the chart is moving DOWN from left to right. Calling for repeated tops in a bull market is financial suicide. The trend is your friend, right?

Step 2: Sectors, Industries, and Stocks Are Not Created Equal

The Semiconductors Index ($DJUSSC) is an industry group loaded with high-octane, growth companies. As our economy and GDP grow, many of these companies find very exciting growth opportunities and take full advantage of them. This allows the LEADERS within this rising group to post gains that make accumulating massive wealth in the stock market possible. But not every group is high-growth like the semiconductor group. Companies in those slower-growth areas will never post that type of sustainable earnings growth. Yet we put way too much faith that the short-term growth rate in other industries will evolve into long-term growth like the semiconductors. It simply doesn’t happen that way and we lose money waiting for it.

Let’s compare semiconductors to several other industry groups within the aggressive sectors (XLK, XLY, XLC, XLI, and XLF) over a 20-year period. The 9 “other” industries are software ($DJUSSW), specialty retailers ($DJUSRS), gambling ($DJUSCA), internet ($DJUSNS), broadcasting & entertainment ($DJUSBC), fixed line communications ($DJUSFC), airlines ($DJUSAR), insurance brokers ($DJUSIB), and banks ($DJUSBK). The chart below is a 20-year weekly chart and each industry is shown as a ratio chart, relative to the benchmark S&P 500. See if you notice differences:

Look at these 10 different industry group RELATIVE charts. If you were to trade a stock in one of these industry groups, would it matter to you which of the industry groups above that it belonged to?

If I looked at the above charts and I was contemplating a trade in one or more of them, the very first question I’d consider is “what’s my time frame?”. If I’m thinking about a long-term swing trade, I would very much prefer for the stock to be in one of those industry groups in BLUE above – those showing much better long-term track records. If I were to look at a trade in say gambling, it would very likely be a quick, short-term trade. And if I did let the stock run, because it was performing well, I’d absolutely want to keep a trailing stop in play. The falling relative strength lines tells me that money is rotating AWAY from this RED group and into groups like those above in BLUE.

So, short-term I could trade stocks in any of the 10 groups, but from a longer-term perspective, I’d clearly be much more interested in the BLUE groups that are uptrending vs. the benchmark S&P 500.

I think that makes common sense, but I would bet that most traders don’t consider this.

Step 3: Trade Leading Stocks

There are a number of ways to evaluate relative strength, but one simple way that’s already a part of the StockCharts.com trading platform is to view top SCTRs (acronym for StockCharts Technical Rank). Personally, I would only tend to use the SCTR if I was looking at very recent performance. If you study the formula for the SCTR calculation, you’ll quickly realize that none of the formula is based on performance beyond 5-6 months. It’s a very near-term relative strength indicator, but a powerful one nonetheless, especially for those that are trading momentum in the very near-term.

You can pull up ChartLists using the Summary view and add the SCTR column. For instance, on our Raised Guidance ChartList (RGCL) that we research for our EarningsBeats.com members, here is how I can look for internet stocks that have raised their guidance in the past quarter, while also listing their SCTR score in order from strong to weak:

Personally, I’d concentrate much more on trading the above stocks with SCTRs at or above 75 and ignoring the rest. Remember, leading stocks in leading industry groups. That’s how you’ll improve your trading success.

Step 4: Exercise Patience and Use Great Timing Techniques

An impatient trader that simply wants to have money invested at all times is generally a bad trader. Buy stocks at YOUR price, not the price market makers want you to buy. In my experience, “chasing” trending stocks has resulted in my biggest and quickest losses. Many times, a stock becomes a leading stock after an excellent quarterly earnings report that’s accompanied by a gap higher in price. Chasing such a stock can be a big problem, especially if that stock “fills its gap”, or returns to the prior closing price before the gap. We try to coach our members to “stalk” stocks. Find stocks you like and then wait, wait, and wait a little bit longer. Buy them at key price/moving average support with tighter stops. That won’t eliminate poor trades, but it’ll certainly reduce your risk at the time of purchase.

Conclusion: Examples

Every weekend (or nearly every weekend), I provide my Fab 5 on YouTube, which is essentially 5 trade setups. Keep in mind that the risk of any trades you make is yours and yours alone, but I believe if you time your trades similar to these setups, you’ll experience better trading results over time. Check out this video:

Fab 5: 5 Stocks You Should Be Stalking Right Now

If you like these setups and would like additional setups more often, please SUBSCRIBE to our FREE EB Digest newsletter with only your name and email address. We provide “Charts of the Day” 3 times per week and the newsletter is absolutely 100% free! You may unsubscribe at any time.

Have a great holiday-shortened week ahead and happy trading!

Tom