Well, I have to admit, I'm always watching this first chart. It's how consumer stocks are performing vs. one another. When consumer discretionary stocks (XLY) are outperforming consumer staples stocks (XLP) over time, I'm generally very bullish U.S. equities. Consumer spending comprises roughly two-thirds of our GDP, so determining which consumer group is performing best is of ultimate importance. Here's the current weekly view:
The blue-shaded area in the bottom panel illustrates the very strong positive correlation between the XLY:XLP ratio and the S&P 500. In other words, they tend to move together in the same direction. Currently, the XLY:XLP is consolidating (similar to the S&P 500) in a bullish relative ascending triangle. This chart alone tells me the odds of the market going higher are solid.
The second chart I'm watching is growth vs. value (IWF:IWD). We saw a shift in August as more traders looked to value stocks ahead of the Fed meeting. After a few awful reactions to Fed policy statements in December 2018, May 2019, and August 2019, it's no wonder that traders were seeking value stocks. But from last Wednesday's post-Fed low to Thursday morning's intraday high, the S&P 500 jumped 1.46%. That was Wall Street's immediate reaction to the Fed. What did growth and value stocks do? The Russell 1000 Growth ETF (IWF) jumped 1.86%, easily surpassing the S&P500, while the Russell 1000 Value ETF (IWD) rose 1.10%, lagging the benchmark. It's been this solid IWF outperformance that has helped to lead U.S. equities higher over the past 2-3 years:
The problem later on Thursday and into Friday was that BILLIONS OF DOLLARS of call premium was on the table and market makers like to cheat. There was a ton of manipulation in the market on quad witching Friday that sent equity prices lower. Volume was extreme, as it usually is on quad witching days, and it behooved market makers to see lower prices. And just like that famous escape artist Houdini....
VOILA! The market makers were free!
The post-Fed reaction and the ensuing market manipulation was so severe that I decided to host an impromptu webinar for our EarningsBeats.com community. Buried in all the end of week rubble were nuggets of very important and bullish information, which I discussed in this video.
If you'll simply sign up for my EarningsBeats Digest newsletter, which is completely free, I'll send you a link to the recording. Send an email to "tom@earningsbeats.com" and I'll get you signed up. I write 3 articles per week (Monday, Wednesday, and Friday), focusing mostly on earnings and relative strength. In the meantime, I'll send you a link to the webinar recording. There's a lot to understanding the stock market. It's not always about supply and demand. I'll help you to uncover one ugly part of Wall Street.
Happy trading!
Tom
