In today's episode of Sector Spotlight, I promised, time permitting, to have at least one change in the RRG L/S basket that I am maintaining in the show and my blogs. Obviously, time did not permit me to cover it during the show, so I am writing it up in this article. And it's actually two changes - one on the long side and one on the short side.
LONG
The current composition of the LONG basket is: FCX, FTI, IVE, SEE, WFC, XLB
The problem child here is SEE.
The overhead resistance in the $46 area has proven to be too much and price has reversed lower off of that level. At the same time, relative strength has broken below its rising support line.
The JDK RS-Momentum line already dropped below 100 a while ago, but for a few weeks towards the end of 2020 it looked as if it was working its way back up, causing the rotation to complete inside the weakening quadrant and pushing back into leading. The odds for that to happen have now faded away and risk is increasing. So I am deleting SEE from the list.
As a replacement on the long side, I am looking at some international exposure, following last week's articles on how the US is starting to lag against other major stock markets around the world. My eye fell on the rotation of the Canadian $TSX vs the DJ Global index, which is about to crossover from lagging into improving.
It's a bit "as-if-and-when" it happens, but the markets that are already inside the leading quadrant have shot up really far, really fast, which makes them not too attractive from a risk/reward point of view.
Canada is a different story. The $TSX index is pushing against, and about to break beyond, its February 2020 high.
The relative strength vs. the DJ Global has been in a long-winding downtrend for five years already. It's still a bit early to call for a major turnaround, but the recent improvement as it is picked up by the RRG lines seems to be pointing to at least a few weeks of outperformance.
The tradable instrument that I am going to add to the list is EWC. Checking the chart of EWC immediately makes clear what I mean when I say that there is a difference between the underlying international market and the US-listed ETF that is quoted in USD.
Short
The current composition of the SHORT basket side is: ADBE, ETR, FB, INTC, IVW, PG
The outlier here is INTC, which jumped away last week, breaking above both a falling and a horizontal resistance level.
On the RS-line, INTC is still below a horizontal level, but some sort of a double bottom is in place and both RRG-Lines are rising rapidly.
There is still a chance that this tail will roll over and never make it to leading, but the power on display at the moment is a bit too big for my liking, so I am taking INTC off the short basket.
With the Consumer Staples (XLP) sector at a negative heading on the RRG for sectors, I sorted through the individual members of that sector and found a good replacement candidate in Costco (COST).
On the RRG, the tail for COST has rotated through leading and into weakening over the last 15 weeks and, at the moment, COST is rapidly heading towards the lagging quadrant at a negative RRG-heading.
The main reason to add COST to the short side of the basket is found in combination with the price chart.
Relative strength has broken below a slightly rising support line, which is pushing the RRG-Lines below 100 and causing the tail to move towards/into the lagging quadrant.
Please note that the RRG (inset) is using XLP as the benchmark while the chart above shows RRG and relative strength vs SPY. With XLP already in weakening vs. SPY and COST still in weakening vs. XLP, it looks like COST has a bit of negative catching up to do vs. SPY.
The icing on the cake to pull the trigger and add COST to the short side of the basket is the completion of a double-top formation on the price chart after breaking rising support.
Recap
So, to recap.
On the long side we have removed SEE and added EWC.
And on the short side, we have removed INTC and added COST.
#StaySafe, --Julius
Julius de Kempenaer
Senior Technical Analyst, StockCharts.com
Creator, Relative Rotation Graphs
Founder, RRG Research
Host of: Sector Spotlight
Please find my handles for social media channels under the Bio below.
Feedback, comments or questions are welcome at Juliusdk@stockcharts.com. I cannot promise to respond to each and every message, but I will certainly read them and, where reasonably possible, use the feedback and comments or answer questions.
To discuss RRG with me on S.C.A.N., tag me using the handle Julius_RRG.
RRG, Relative Rotation Graphs, JdK RS-Ratio, and JdK RS-Momentum are registered trademarks of RRG Research.
