Weakness In The XLK, XLC, And XLY Signal Weakness In The Broader Averages (ETF Sector Performance For The Week Of 9/14-9/18)
Investment thesis: technology, communication services, and consumer discretionary are three of the largest components in the SPY and QQQ. All three are weakening, which means the broader averages are probably heading lower.
Let’s start with this list of the SPY’s sector components:
Information technology, communication services, and consumer discretionary comprise 49.63% of the index.
Here’s the same data for the QQQ:
Information tech, communication services, and consumer discretionary comprise 85.18% of the QQQ.
If we think of the individual sectors as the frame or scaffolding for the SPY and QQQ, then the (XLK), (XLC), and (XLY) are the important support structures for the QQQ and and SPY. Unfortunately, all three sectors are weakening, indicating the most likely course for the QQQ and SPY is lower.
Let’s start with the XLK’s daily chart:Prices broke a nearly 3-month uptrend this week. There is an accompanying volume spike indicating increased activity. Prices closed below the 50-day EMA; momentum is declining.The weekly chart shows the trend break with more clarity. This chart’s momentum index is about to give a sell signal. Since this is a monthly chart, the MACD will print slowly.
Next, let’s turn to the XLC:
The XLC broke its trend a little earlier than the XLK. It has closed below the 50-day EMA with declining momentum.The XLC’s weekly chart is similar to the XLKs; the trend break is clear while the MACD is about to give a sell signal.
Finally, here’re the relevant charts for the XLY:The chart follows a now familiar pattern: a recent trend break followed by a modest meandering lower. The right-hand panel — which shows a chose-up of the last month — shows that Friday’s close was below the low establishedin earlier September. Momentum has been declining for three months.The weekly chart clearly shows the trend. Like the weekly charts for the XLK and XLC, the XLY’s MACD is about to give a sell-signal as well.
To conclude, it’s difficult to see the SPY or other major averages moving higher when three of its largest sector components appear primed for a move lower. This does not mean, however, that an imminent crash is on the horizon. Remember that the economic fundamentals mostly support a rising stock market. As I noted yesterday, the long-leading, leading, and coincidental indicators are mostly positive. Helping the bullish argument is the Federal Reserve, which this week stated they’ll keep rates low for a few years. The central bank also has ample room on its balance sheet to ramp-up purchases should that be needed. Then there’s the potential final wild card: fiscal action.
However, the charts tell us that the broader averages are most likely headed lower in the next few weeks.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.