Industry Cycles
Last week, I noted the "strange" behavior of the markets, and in particular, the industry charts flashing signals that the market cycle is coming to an end. The cycle duration was telling me it's too early for the cycle's end, but the behavior was indicative of a cycle's conclusion. The market moves over the last week just strengthened my hunches, and I have to call this cycle as one that has reached its end.
First, let's take a look at the industry cycle chart. There was a significant spike on Friday, with 31 industries reaching their cycle low points. That's a very clear signal that the drop in the markets has been substantial:
The breadth also looks pretty weak, and the majority of the stocks made downward moves over the week:
Funnily enough, if you look at QQQ, the picture is completely bullish, with a beautiful green candle this week:
That's the power of a few large stocks like NVDA carrying the major indexes upwards.
What I expect next is a lot of gyrations and more cycle low spikes. I expect volatility to go up and VIX to shoot upwards. Timing these things is hard, and we might not see anything different for another week, but for all trading purposes, I am avoiding opening longs with market orders and continue to favor short-side strategies.
Industry Highlights
All the industries highlighted in recent weeks have pulled back, which is unsurprising considering the cycle has ended. I don't have any particularly strong industries to point out. Perhaps what stands out is that a lot of REIT-related industries had a somewhat decent week in terms of breadth.
The REIT - Office industry has had a significant jump:
Some of the stocks that I track in this industry:
ARE,"Alexandria Real Estate Equities, Inc.",Real Estate,REIT - Office,USA
BXP,"Boston Properties, Inc.",Real Estate,REIT - Office,USA
VNO,Vornado Realty Trust,Real Estate,REIT - Office,USA
KRC,Kilroy Realty Corporation,Real Estate,REIT - Office,USA
SLG,SL Green Realty Corp.,Real Estate,REIT - Office,USA
HIW,"Highwoods Properties, Inc.",Real Estate,REIT - Office,USA
DEI,"Douglas Emmett, Inc.",Real Estate,REIT - Office,USA
EQC,Equity Commonwealth,Real Estate,REIT - Office,USA
JBGS,JBG SMITH Properties,Real Estate,REIT - Office,USA
ESBA,"Empire State Realty OP, L.P.",Real Estate,REIT - Office,USA
DEA,"Easterly Government Properties, Inc.",Real Estate,REIT - Office,USA
I don't particularly like any of the charts in these companies, so I am definitely staying away from this industry.
The REIT - Residential industry is also showing a decent breadth picture, and I find the price charts of some tickers really healthy and attractive for long positions. The only thing that is most likely to keep me out of them is that the cycle is ending, and I am not entirely sure which way the market will want to move. Anyway, here is the breadth chart:
And some of the tickers that I track in this industry:
ticker, company, sector, industry, country
AVB,"AvalonBay Communities, Inc.",Real Estate,REIT - Residential,USA
ESS,"Essex Property Trust, Inc.",Real Estate,REIT - Residential,USA
MAA,"Mid-America Apartment Communities, Inc.",Real Estate,REIT - Residential,USA
SUI,"Sun Communities, Inc.",Real Estate,REIT - Residential,USA
AMH,American Homes 4 Rent,Real Estate,REIT - Residential,USA
ELS,"Equity LifeStyle Properties, Inc.",Real Estate,REIT - Residential,USA
UDR,"UDR, Inc.",Real Estate,REIT - Residential,USA
CPT,Camden Property Trust,Real Estate,REIT - Residential,USA
In addition to REITs, I would like to add Waste Management to this section:
The tickers that I track in this industry:
ticker, company, sector, industry, country
WM,"Waste Management, Inc.",Industrials,Waste Management,USA
RSG,"Republic Services, Inc.",Industrials,Waste Management,USA
WCN,"Waste Connections, Inc.",Industrials,Waste Management,Canada
GFL,GFL Environmental Inc.,Industrials,Waste Management,Canada
CLH,"Clean Harbors, Inc.",Industrials,Waste Management,USA
Struggling industries
I am going to keep metals here again, starting with Gold:
ticker, company, sector, industry, country
NEM,Newmont Corporation,Basic Materials,Gold,USA
AEM,Agnico Eagle Mines Limited,Basic Materials,Gold,Canada
GOLD,Barrick Gold Corporation,Basic Materials,Gold,Canada
WPM,Wheaton Precious Metals Corp.,Basic Materials,Gold,Canada
FNV,Franco-Nevada Corporation,Basic Materials,Gold,Canada
GFI,Gold Fields Limited,Basic Materials,Gold,South Africa
AU,AngloGold Ashanti Limited,Basic Materials,Gold,United Kingdom
RGLD,"Royal Gold, Inc.",Basic Materials,Gold,USA
PAAS,Pan American Silver Corp.,Basic Materials,Gold,Canada
AGI,Alamos Gold Inc.,Basic Materials,Gold,Canada
OR,Osisko Gold Royalties Ltd,Basic Materials,Gold,Canada
EGO,Eldorado Gold Corporation,Basic Materials,Gold,Canada
Copper arguably has had even deeper shake down:
ticker, company, sector, industry, country
SCCO,Southern Copper Corporation,Basic Materials,Copper,USA
FCX,Freeport-McMoRan Inc.,Basic Materials,Copper,USA
HBM,Hudbay Minerals Inc.,Basic Materials,Copper,Canada
ERO,Ero Copper Corp.,Basic Materials,Copper,Canada
IE,Ivanhoe Electric Inc.,Basic Materials,Copper,USA
Again, the full list of industries that have their breadth at low points that are lower than 30% is longer than I could fit in this newsletter. The cycle end is here indeed.
Closing thoughts
I am very curious to see what develops next. We have a major diversion on our hands where the overall market breadth is deteriorating while the indexes are going up. This means that the majority of the stocks have been dropping while the indexes are rising. Usually, they move hand in hand. Now, if the indexes turn down and start dropping, all those stocks that were already weak will drop even more. In short, we could have a major drop on our hands.
Another part of me is entertaining the idea that this is just a normal market cycle end, the shakeouts have started while the indexes remained at all-time highs, and we will get another strong move up into the election. Honestly, nothing would surprise me at this point.
I find myself at a strange point in my portfolio where I only opened two new shorts over the last two weeks. I think this is due to the fact that I didn't expect the cycle end to start this soon. And I still have a significant number of long positions open, although the stops are much closer now.
Let's see how this will all play out!