Relative Confusion

by JC Parets  -  May 22, 2019

We’ve been discussing the lack of trend in the major indexes, highlighting some relative strength in places like software and insurance. But overall signals remain mixed.

Today, let’s focus again on areas showing relative strength. We’re hoping to find a clean theme with the most actionable stock setups.

What we found, as my colleague Tom Bruni, noted, can be boiled down to the length of two tweets…

Going through the S&P 500 I see a number of actionable names on the long side, but they don’t all fit a theme. They’re all from different areas of the market. Where there are themes, I see a lot of extended names and unattractive entries.

And…

I can see that the path of least resistance is higher in a lot of names, but that doesn’t mean that current levels offer an attractive entry.

Great themes, for sure, but no great way of executing them… Or, great names, but no significant theme driving them…

Ideally, we’d have both. But we don’t. So, let’s work with what we’ve got.

Here’s a chart showing the performance of railroad stocks relative to the S&P 500 Index, midway between its upside price objective and a sound risk-management level.

This remains one of the strongest trends in the market, and there’s little evidence of it changing anytime soon.

Five-year history of the performance of the S&P 500 Railroads sub-index relative to the S&P 500 Index.

[Click to Enlarge]

The next theme we’re looking at is the outperformance of the solar industry relative to the energy sector.

Take a look at this breakout from a one-and-a-half-year base to a three-year high for the Invesco Solar ETF (NYSEArca: TAN) relative to the Energy Select Sector SPDR Fund (NYSEArca: XLE).

As long as it’s above its 2018 highs, the trend is intact…

Intermediate-term history of the performance of the Invesco Solar ETF (NYSEArca: TAN) relative to the Energy Select Sector SPDR Fund (NYSEArca: XLE).

[Click to Enlarge]

On an absolute basis, TAN is pressing up against the top of a nice, multiyear base. We need to see it clear $27 to confirm a breakout. But I think we ultimately get there in the coming few weeks and months.

Four-year performance history of the Invesco Solar ETF (NYSEArca: TAN).

[Click to Enlarge]

On the more defensive side of the market, consumer staples are putting in a higher low relative to the S&P 500. But on an absolute basis, a lot of large-cap consumer staples components are very extended.

Five-year history of the performance of the Consumer Staples Select Sector SPDR Fund (NYSEArca: XLP) relative to the SPDR S&P 500 ETF (NYSEArca: SPY).

[Click to Enlarge]

We think railroads and solar continue to work, so we can be buying stocks in those areas where current levels offer an attractive entry.

To wise investing,

J.C. Parets
Editor, Big Market Trends