Sector ‘Heat Map’ Shows Cooling Appetite for Risk

Every bull market has a certain life expectancy. Nobody knows how long this bull will live, but a look at the S&P 500 industry sector ‘heat map’ shows ‘graying around the temples’ as investors rotate out of higher risk industries.

A rising tide lifts all boats. This sounds cliché, but was certainly true in 2013.

The first chart below shows the Q4 2013 performance of the nine S&P 500 sector ETFs. Those nine ETFs are:

  • Industrial Select Sector SPDR ETF (NYSEArca: XLI)
  • Technology Select Sector SPDR ETF (NYSEArca: XLK)
  • Consumer Discretionary Select Sector SPDR ETF (NYSEArca: XLY)
  • Materials Select Sector SPDR ETF (NYSEArca: XLB)
  • Financial Select Sector SPDR ETF (NYSEArca: XLF)
  • Health Care Select Sector SPDR ETF (NYSEArca: XLV)
  • Consumer Staples Select Sector SPDR ETF (NYSEArca: XLP)
  • Energy Select Sector SPDR ETF (NYSEArca: XLE)
  • Utilities Select Sector SPDR ETF (NYSEArca: XLU)
    The ETFs are sorted based on Q4 2013 performance.

More risky, high beta sectors (red colors) like technology and consumer discretionary were red hot in the last quarter of 2013.

‘Orphan & widow’ sectors (green colors) like utilities and consumer staples lagged behind higher risk sectors.

The first chart is a snapshot of a healthy overall market. No wonder the S&P 500 ended 2013 on a high note.

The second chart shows that the tide turned in 2014. Conservative sectors are now swimming on top, while high octane sectors have sunk to the bottom of the performance chart.

This doesn’t mean the bull market is over, but the distribution of colors illustrates that investors have lost their appetite for risk (for now).

Like graying around the temples, this rotation out of risk reminds us of an aging bull market.

It’s not yet time to order the coffin, but indicators like this do warn of the potential for a deeper correction.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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Federal Reserve ‘Financed’ 17% of all U.S. Stock Purchases

At one point or another over the last few years we’ve all heard about the bursting Federal Reserve Balance sheet (it’s still growing by the way). However, how big is the Fed’s balance sheet in correlation to the total U.S. stock market? It’s big!

A billion used to be a big number, but ‘billions’ today are outdated like Myspace.

Today we (and with ‘we’ I mean the Federal Reserve) talk in trillions.

The Federal Reserve’s balance sheet is about $3.7 trillion. As recently as July 2008 the Fed’s balance sheet was below $900 billion.

Since then the Fed embarked on a little shopping spree (about $3 trillion worth). As it turns out, when the Fed goes shopping, Wall Street goes shopping.

According to the World Bank, the total market capitalization of the U.S. stock market in 2012 was $18.67 trillion (2013 estimate around $21.4 trillion).

Based on preliminary 2013 figures, the Federal Reserve’s balance sheet could have bought 17% of all U.S. traded stocks.

The chart below provides a visual as it plots the total annual U.S. stock market capitalization against the S&P 500. According to Standard & Poor’s, there is over $5.14 trillion benchmarked to the S&P 500 index (NYSEArca: SPY).

We know that the Federal Reserve doesn’t directly buy equities (other central banks do), but it may as well have.

The Federal Reserve is pumping about $85 billion of fresh money (about $110 billion total since maturing funds are reinvested) into the ‘economy.’

‘Economy’ sounds better than big banks and financial institutions (the Fed calls them primary dealers, there are 21 such primary dealers, most of them U.S.-based), but that’s where the money is going.

Big banks on the other hand turn around and buy stocks and ETFs – which may include Financial Select Sector SPDR (NYSEArca: XLF), or SPDR S&P Bank ETF (NYSEArca: KBE), and of course Twitter, LinkedIn and Facebook (not Myspace).

Aha Moment

We’ve all heard how big the Federal Reserve’s balance sheet is before and have gotten used to (and desensitized) to the number.

However, when viewed in comparison to the total market capitalization of all U.S. traded stocks, it becomes obvious just how big a player the Federal Reserve really is.

If you – like me – are fascinated with large numbers, you’ll like this little piece of trivia:

Is it possible to put a price tag on all the assets held in the entire United States of America? Yes it is. In fact, we’ve done this right here (based on Federal Reserve data): How Much is The Entire United States of America Worth?

Simon Maierhofer is the publisher of the Profit Radar Report.

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XLF Financial ETF is Teetering Above Key Support

The average investor may not be aware of this, but the SPDR Financial ETF (XLF) is sitting right above major support. This in itself is noteworthy, but its message is further emphasized by the fact that the S&P 500 and Nasdaq are struggling to overcome major resistance.

The Financial Select Sector SPDR (NYSEArca: XLF) chart below features exactly the same support/resistance levels highlighted in my September 12 article about XLF.

It is interesting to note that XLF has come back to test support made up of prior support/resistance levels at 20.30 – 20.50.

We also note that XLF peeled away from resistance at 21.15, which was the September 2001 monthly candle low.

I’ve kept past trend lines on the chart to illustrate that XLF tends to respect support/resistance trend lines created by prior price action.

The green bubble, for example, marks a technical breakout in August 2012. This breakout was foretold by the August 5, 2012 Profit Radar Report, which stated that: “Financials are currently underloved. With such negative sentiment, a breakout above 14.90 could cause a quick spike in prices.”

The gray bubble highlights a fakeout trend line break, which can also be seen on the S&P 500 chart.

In fact, the October 7 Profit Radar Report expected the fakeout trend line break for the S&P 500 (at the time the S&P 500 trend line was at 1,668) and stated that: “A dip below 1,668 followed by a close above 1,671 would most likely be a buy signal.

The fakeout dip below support was expected based on prior fakeout breakdowns that led to new highs (see chart below, originally published in the October 7 Profit Radar Report).

The S&P 500 (NYSEArca: SPY) and Nasdaq Composite (Nasdaq: ^IXIC) are currently bouncing against major long-term resistance. Failure to overcome resistance may cause a correction.

That’s why this support shelf for XLF gains additional importance. A drop below support for XLF will likely indicate more down side, while the ability to stay above would be net bullish for the broad market. The chart for the Vanguard Financial ETF (NYSEArca: VFH) looks similar.

Summary

Investors should keep a close eye on whether support for XLF and resistance for the S&P 500 and Nasdaq holds.

As long as both hold, the broad market is ‘trapped’ in a sideways range (as we’ve seen over the last two weeks).

Where is key resistance for the S&P 500 and Nasdaq? Detailed charts and commentary are available here: Nasdaq and S&P 500 Held Back by ‘Magic’ Resistance.

Simon Maierhofer is the publisher of the Profit Radar Report.

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Banks – Record High Excess Deposits May Fuel Stock Bubble

JPMorgan just recorded the largest amount of excess deposits in the history of banking. This sounds good at first glance, but it reflects a trend that exposes the entire banking sector to way above average ‘human error.’

In the aftermath of the financial crisis, the Fed kept encouraging banks to lend more.

Money makes the world go round and if banks don’t lend the economy doesn’t hum.

As of June 30, total loans by JPMorgan hit the lowest amount ($726 billion) since September 2012. Yeah, that’s not great, but not terrible either, it’s only a 9-month low.

At the same time deposits hit an all-time high of $1.203 trillion. That doesn’t sound bad; it just shows that JPM is well capitalized.

But behind the façade of engineered figures lurk some troubling questions:

  1. Banks are supposed to lend the money entrusted to them via customer deposits. The interest margin is where banks make their money. Apparently though, the margin business is no longer as attractive as it once was.

    Investing customer funds is obviously more profitable than lending. What happens if banks have no incentive to lend?

  2. JPMorgan’s excess deposits are at an all-time high of $477 billion ($1.203 trillion – $726 billion). Where does the excess money go?

The ‘London Whale’ trading disaster, which cost JPM some $3.4 billion (as far as we know), was funded by excess deposits.

With 61%, JPMorgan has the lowest loan-to deposit ratio and leads a trend. The average loan-to-deposit ratio for the top eight commercial banks has dropped nearly 10% in recent quarters.

We don’t know exactly where banks put their money, but we know Wall Street is just plain greedy. Like a horse, big banks will gorge themselves on juicy returns regardless of the consequences.

Right now it’s easier to make money with stocks, junk bonds, and other sophisticated leveraged instruments than lending. No doubt that’s where money is going and $477 billion (that’s just from one US bank) can buy a lot of stuff.

Based on past experience, big banks don’t know when enough is enough. Rather than stopping while they’re ahead, they’ll continue to play until someone gets stuck with a hot potato.

As per last week’s ETF SPY analysis, the Financial Select Sector SPDR (XLF) does not appear to have reached the end of the rope yet.

Higher prices are still likely, but technicals as well as big banks propensity for short-sighted decisions, caution that this time may only have been delayed, not different.

Weekly ETF SPY: XLF – Ticks Away from New 48-Months High

The Financial Select Sector SPDR ETF (SPY) and entire financial sector are quietly closing in on a 48-month high. Buoyed by Bernanke, rising interest rate margins, and technicals, how high can financials fly?

It’s been a little while since we looked at the Financial Select Sector SPDR (XLF). The March 15, Weekly ETF SPY featured a long-term chart of XLF that showed a broad support/resistance range.

The daily XLF chart below includes the same support/resistance range (red bar). This range halted the XLF rally in March and April 2013 and proved support for the recent correction.

The fact that XLF didn’t drop below the ‘red box’ was one of the reasons I didn’t trust the latest correction. XLF found support where it should have.

As of today, XLF is just ticks away from eclipsing its May 22 high. A spike above would result in the highest reading since September 2008, 48 months ago.

Once the May 22 hurdle is cleared, there is no real resistance until the 50% Fibonacci retracement of the points lost from May 2007 to March 2009 at 22.

What is worrisome and can be indicative of a ‘last hurrah rally’ is the significant lag of RSI since its high watermark in September 2012 (red dot).

The last leg of the big XLF rally started when sentiment surrounding the financial sector reached a significant low (green dot). At that time, on August 5, 2013, the Profit Radar Report wrote:

“Financials account for 14.21% of the S&P 500, which makes them the second biggest sector of the S&P 500 (behind technology) and worth a closer look. The SPDR Financial Sector ETF (XLF) is butting up against minor trend line resistance at 14.90 and the previous June/July highs at 14.85.

Financials are currently under loved (who can blame investors). Of the $900 million invested in Rydex sector funds, only $18 million (2%) are allocated to financials.

With such negative sentiment a technical breakout (close above 14.90) could cause a quick spike in prices.”

A similar bullish sentiment extreme would be a welcome tell tale for a future selling opportunity. Perhaps we’ll see that closer to 22.

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Weekly ETF SPY: XLV – Head-and Shoulders Above Other Sectors

The Health Care Select Sector SPDR ETF (XLV) sports the second best year-to-date performance. Recent price action has exposed a key short-term support level that can be used as a trigger level for investors looking to short the health care sector.

The Health Care Select Sector SPDR’s (XLV) performance ranks head-and shoulders above the rest. XLV is up 19.19% year-to-date, outperformed only by utilities (XLU is up 19.66%).

Other double-digit year-to-date performers include the Consumer Staples Select Sector SPDR (XLP – 17.89%), Consumer Discretionary Select Sector SPDR (XLY – 15.46%), Financial Select Sector SPDR (XLF – 14,48%) and Energy Select Sector SPDR (XLE – 10.08%).

Technology (XLK), industrials (XLI) and materials (XLB) are stuck in single digit performance territory.

Looking at the performance (and possible cracks) of leading sectors often provides clues for the overall stock market. Prior ETF SPY’s identified key support for other leading sector ETFs like the iShares Russell 2000 ETF (IWM) and SPDR Retail ETF (XRT).

Key support for IWM and XRT has proven crucial to the short-term performance of IWM and XRT. Bot sectors/ETFs bounced exactly from support.

Not all technical analysis proves correct with that much clinical precision, but XLV is at a point where key support has become visible.

The chart below shows that XLV may be carving out a short-term head-and shoulders pattern with a neckline around 46.70. This week this potential neckline coincides with trend line support.

A break below 46.70 would unlock a measured target of 45.15 +/-, which also coincides with trend line support.

As long as support holds, the up trend remains intact and we’re just talking about ‘unhatched eggs.’ Investors fishing for a price top may use broken support as a trigger level for short positions.

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Earnings Euphoria: Precursor to Bearish Mean Reversion?

Corporate America has never before seen higher profits than now. Are healthy profits a reflection of a healthy economy or have earnings reached a point of unsustainability?

In good old times past it used to be that when complacency reigns on Wall Street, investors get wet. It’s different in a QE world; When complacency reigns, investors get wet eventually. Are investors complacent?

Bloomberg reports: “With 72% of earnings exceeding analysts’ estimates, it may be difficult for U.S. stocks not to reach a record in 2013. The S&P 500 is poised to recover fully from the financial crisis that began almost six years ago.”

According to 11,000 analysts’ estimates compiled by Bloomberg, profits of S&P 500 companies are expected to exceed $1 trillion this year, 31% more than when the gauge peaked. Bloomberg calls this the “biggest expansion in profits since the technology bubble of the 1990s.”

This is a bold statement. There was not only the earnings explosion of the late 1990s, there was also the financial leverage earnings explosion of the mid 2000s. In 2007, earnings of the financial sector (corresponding ETF: Financial Select Sector SPDR – XLF) accounted for over 40% of all U.S. profits.

It’s hard to believe that S&P 500 earnings today are 77.6% higher than at the 2000 peak and 10.3% higher compared to the prior 2007 all-time high.

A voice of reason often tends to get over looked in an unreasonable world, but the chart below reminds us of unpopular past realities. Mean reversion took many by surprise and earnings peaks turned into stock market peaks.

What do earnings tell us about stocks? Corporate earnings aren’t a short-term timing tool and shouldn’t be used as such, but record earnings sow the seeds for subsequent declines.

The S&P is currently trading just above a major long-term support/resistance level. As long is it remains above support, stocks may grind higher, but a trip below may quickly turn into a fast and furious decline.

The Profit Radar Report highlights the support and risk management levels needed to avoid a surprise move.