Stock Sector Scout, 29 September 2024
Cycle Has Entered Mature Stage, REITs Pulled Back, Metals Strong
Market Overview
The S&P 500 index reached another high, and once again, all other major indexes had a positive week. The NDX remains below its all-time high and either has some catching up to do or will not reach the high before the markets turn down.
I will continue posting the VIX weekly chart:
Its range is tightening and remains above the previous year-long downward trend. What's notable is how it is not returning to the previous low areas and remaining somewhat elevated. This should be telling us that more volatility is in our near future.
Industry Cycles
I thought for sure that this September would break my industry-based cycle count system and deviate from it with a super short cycle that barely lasted a month. All the seasonal September data shows that September is the worst month for stocks. The first week of September followed that script well. But the cycle count said that it was too early for the market to turn down. Sure enough, the market changed its mind after the first week and finished the month with record highs in the S&P 500 and gains across many industries.
Here is what the industry cycle starts chart looks like right now:
The August 7th cycle has been chugging along and has now passed 50 calendar days in age. This is the time when I consider the cycle very mature and prepare for the cycle end. The odds are increasing that in the next several weeks we should see the markets turn downwards.
The cycle high chart has shifted significantly to the end of last week:
This makes me consider even more that we are entering the cycle end picture. Push the industries up and glide down from here. But of course, there are no guarantees here, and nothing in the markets is 100%.
Market breadth is showing a strong drive since August 7th and almost a new breadth high:
I find it interesting that it failed to reach the breadth high and again would suggest to me that this is perhaps it for this cycle. You can see it reaching 80% breadth on August 27th, then 77% on September 19th, and another push on Friday to 73%. Each number getting smaller.
Industry Highlights
Before mentioning industries, it must be noted how much Chinese stocks jumped over the previous week. It does not matter which industry; all of them jumped, and jumped big after the government stimulus measures. Here is a weekly chart of the HXC index:
That's one hell of a weekly candle. If you were lucky enough to hold any Chinese stocks, you were surely rewarded. You can see how the index has been making lower highs for almost two years, and the Chinese government apparently has had enough. A new one-year high on a crazy green candle.
Outside of China, we have metals acting strong: Copper, Gold, Aluminum, and Silver are all back to trending upwards.
Coking Coal was on a prolonged downward move, and I was super close to getting into one of its leading stocks, AMR, on a major pullback. But the whole industry has reversed, and AMR has run away from me at this time:
It's a small group that is usually uncorrelated to the rest of the market and something I like to hold from time to time. Here are the stocks that I track in this industry:
ticker, company, sector, industry, country
HCC,"Warrior Met Coal, Inc.",Basic Materials,Coking Coal,USA
AMR,"Alpha Metallurgical Resources, Inc.",Basic Materials,Coking Coal,USA
ARCH,"Arch Resources, Inc.",Basic Materials,Coking Coal,USA
SXC,"SunCoke Energy, Inc.",Basic Materials,Coking Coal,USA
METC,"Ramaco Resources, Inc.",Basic Materials,Coking Coal,USA
Thermal Coal has reached similar highs, although it wasn't bottoming like Coking Coal was:
The stocks that I track in this industry:
ticker, company, sector, industry, country
ARLP,"Alliance Resource Partners, L.P.",Energy,Thermal Coal,USA
CEIX,CONSOL Energy Inc.,Energy,Thermal Coal,USA
BTU,Peabody Energy Corporation,Energy,Thermal Coal,USA
NRP,Natural Resource Partners L.P.,Energy,Thermal Coal,USA
HNRG,Hallador Energy Company,Energy,Thermal Coal,USA
NC,"NACCO Industries, Inc.",Energy,Thermal Coal,USA
I have been long watching and waiting to see how Semiconductors will behave. In this cycle, they have been really stuck and not moving anywhere. All of that changed last week:
Chemicals had somewhat of a breakout from two weeks ago, and it has continued:
Here are some tickers that I track in this industry:
ticker, company, sector, industry, country
DOW,Dow Inc.,Basic Materials,Chemicals,USA
CE,Celanese Corporation,Basic Materials,Chemicals,USA
UNVR,Univar Solutions Inc.,Basic Materials,Chemicals,USA
OLN,Olin Corporation,Basic Materials,Chemicals,USA
HUN,Huntsman Corporation,Basic Materials,Chemicals,USA
MEOH,Methanex Corporation,Basic Materials,Chemicals,Canada
TROX,Tronox Holdings plc,Basic Materials,Chemicals,USA
BAK,Braskem S.A.,Basic Materials,Chemicals,Brazil
REX,REX American Resources Corporation,Basic Materials,Chemicals,USA
Struggling industries
Those who have been following this newsletter closely should have noticed me highlighting REITs for the whole summer. I also noted last week how REITs appear to be putting in a major pullback, the first one of its current move to the upside. Last week was more of the same. Pretty much all REIT corners have had a pullback. It's completely normal for strong industry moves to have periodic pullbacks to digest the gains. I will be watching the longer-term trend with REITs. I am in a few of them myself, and so far, the stops have not been triggered.
First, let’s start with REIT - Residential:
As you can see, this pullback was long overdue, and the long-term trend is still strong.
REIT - Industrial almost set a new low in breadth as well:
Similar to Residential REITs, the long-term trend breadth is still very high.
And finally, Utilities - Water, which I had mentioned as doing great during the summer, has pulled back:
All of these look like profit-taking/short-term moves to me, but they're worth noting.
Closing thoughts
I had to close the first short I added two weeks ago as the markets continue to move up and it went above my stop price. I am OK with that, from time to time I am early with some of my positioning and have to take a small loss. Meanwhile my long positions all stayed intact and continued to move up.
As I mentioned earlier in the newsletter, in this phase of the cycle, I will be avoiding adding any new longs, especially on market orders, or based on breakout/new high type patterns. This is the time for me to see if I can run into a good looking shortable pattern and add that to my portfolio. The long positions will remain for as long as stops are not hit as I do not proactively close my longs fully. I take some profits here and there, but full position close happens only when the stops are hit and the markets have been moving upwards.
Next week I will be closely watching how long this Chinese stock rally will go. I have one stock in that area that has appreciated over 50% in just a tad over one week. I am very skeptical of such gains and had to take some profits. Let’s see how far the rest will run.