Stocks held up surprisingly well in Monday's session as weak economic data reduced fears that the Fed would change their accommodative policy. Despite the positive close, the market internals were negative on the NYSE and just slightly positive on the Nasdaq.
The sharply lower weekly closes make a move above the May 22 highs quite unlikely but nothing is impossible. Many of what the investment public considered "safe sectors" were already turning lower as the widely watched major averages were continuing to make new highs.
If the overall market can rebound as part of the top-building process, even the beaten down defensive sectors are likely to see an oversold bounce. Many cautious investors flocked to the low volatility ETFs, and by early March, one ETF provider reported an inflow of $4 billion into its four low volatility ETFS.
These ETFs kept pace with the Spyder Trust (SPY) up to the May 22 highs but are now 4-6% lower. A technical review of the weekly and daily data on these ETFs indicates they still have significant downside potential.
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Chart Analysis: The PowerShares S&P 500 Low Volatility ETF (SPLV) is a $4.34 billion that has 24% in consumer defensive and 30% in utilities, which helps explain its recent slide.
- The fund formed a key reversal on May 22 as it had a high of $32.74 before closing at $32.08.
- The weekly chart shows that SPLV closed that week below the low of the prior week, which is good sign that the trend is changing.
- The selling picked up sharply last week with the major 38.2% Fibonacci retracement support at $30.44.
- An eventual drop to the 50% support at $29.73 would not be surprising.
- The weekly relative performance dropped below its WMA and support at line a, two weeks before the highs.
- The RS line is declining sharply, which suggests it will continue to be weaker than the S&P 500.
- The weekly OBV formed a negative divergence at the recent highs, line b.
- This is one of the more reliable OBV sell signals and the OBV could test its WMA.
- There is first weekly resistance now at $31.61.
- This increases the chances of either some sideways trading or an oversold bounce.
- Monday's early weakness and higher close may be the first sign of a rebound.
- The daily uptrend, line c, is now in the $29.15 area.
- The daily relative performance peaked on April 19 and dropped below its WMA a week later.
- The break of the uptrend, line d, in the RS line occurred on May 8.
- The volume was heavy on May 8 as the daily OBV dropped below its WMA.
- The daily OBV also formed sharply lower highs (line e) as SPLV was making its high.
- This negative OBV divergence was confirmed two days later by the weekly signals.
- There is initial resistance at $31.50 with the declining 20-day EMA at $31.75
The iShares MSCI USA Minimum Volatility Index (USMV) is a $2.59 billion ETF, which has 16.8% in consumer defensive but only 8.4% in utilities. Its highest concentration is 17.6% in healthcare.
- It had a reversal high in May of $34.48 and at Monday's low was down 5.1% from the high.
- The daily starc- band has been tested with the weekly at $32.40.
- The 38.2% Fibonacci retracement support is at $32.06 with the 50% at $31.32.
- The daily relative performance broke its downtrend, line a, in February when it was trading near $31.
- This positive signal was reversed when the RS line broke its support, line b, almost two weeks before the price high.
- The volume was low in early May but theon-balance volume (OBV)has held up better than the RS line. The OBV is now below its flat WMA.
- There is first resistance now in the $33.50-$34 area.
The iShares MSCI Emerging Market Minimum Volatility Index (EEMV) has assets of $1.7 billion with over 25% in financial services and 14% in the consumer defensive sector.
- The weekly chart shows that an LCD was triggered two weeks ago.
- The close last Friday was well below its daily starc- band.
- The weekly doji high was $63.88, which occurred on May 8.
- Last week's close was quite close to its weekly starc- band and the major 38.2% Fibonacci retracement support at $58.95.
- The monthly pivot support is at $58.19 with the 50% retracement support at $57.43.
- The relative performance violated key support, line c, in the middle of March.
- The weekly OBV did confirm the recent highs and is still well above its rising WMA and the uptrend, line d.
- There is minor resistance at $61 with the declining 20-day EMA at $61.80.
What it Means: The combined use of relative performance and OBV analysis can often provide you with clear warnings when it is time to take some profits as I noted last week.
This is also true of sectors and ETFs as all three of these low-volatility ETFs showed signs of weakness well before they made their price highs.
The weekly analysis looks the most negative on the PowerShares S&P 500 Low Volatility ETF (SPLV).
The difference in the composition of these ETFs illustrates why it is important to do your research before you buy. All have reasonable expense ratios of 0.25% or lower, but you should always check expense ratios on all ETFs you are considering.
If you are long these ETFs, they should see a further rally if you are looking to sell. The rallies are expected to fail, and I would expect Monday's lows to eventually be broken. They could lose another 5% or more before they bottom out.
How to Profit: No new recommendation
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.