The FRED Report – Financial Research, Education & Data
Volume 16, Issue 13
Trading Week Starting February 20, 2024
Download PDF Version here
Summary of Market View
In Stocks, we discuss breadth and breadth momentum, in the context of a narrow market. We are seeing so much commentary on this that it may take even longer for this to have a deleterious effect (if it does not fix itself). In Fixed Income, we look at Mortgage Back Securities, old friends from the Financial Crisis in 2008.
In Commodities, we discuss Oil Service ETFs, and there are a couple of surprises here. In International, we look at some alternative Indian Market ETFs. Last, in Chart of Interest, we discuss Pakistan, which is underperforming India.
Stock Review (Back to top)
We are seeing a lot of discussion (it is everywhere!) on narrow breadth and participation, and we have even written about this ourselves. The real question is what this means for the current market, and what we should do about it. The first thing we want to be clear on is that breadth is a condition indicator and not a timing tool. The same is true of valuation by the way. By this we mean that lousy breadth and high valuation are present at most tops, but do not give tradable signals or indication that a top is in. In the current situation I remember my old friend Newton Zinder who said, “Whatever everybody knows ain’t worth knowing”. Since this discussion is everywhere, it may take longer to have an effect. We have mentioned that two things can happen. The first is that the market broadens out and these concerns go away. The second is that this leads to a bear market. Since everybody is talking about these conditions, they can go on longer than anybody expects. The key here (as it is all the time), is risk management – having a strategy to avoid giving back the lion’s share of profits we’ve made, while understanding that we will not sell at the absolute top in the event of a negative resolution of these conditions.
Technical Analysis and understanding market structure can really help in this regard. A negative resolution of these conditions is not assured, as we continue to see signs that the market is broadening out. We are doing a portfolio for one of our consulting level clients, and there are a number of stocks in there with great patterns that are not widely discussed. To conclude, the narrowness is a concern, but one that may resolve itself without a major correction. We show a chart of our Weekly Fred’s Breadth Oscillator, below. This tool measures breadth momentum rather than actual breadth, and has been weak for a while, highlighting out concern.
Fixed Income Review (Back to top)
We have not looked at our old friends from 2008, 2009 in some time. Today we will look at MBB (iShares® Barclays MBS Bond Fund) and CMBS (iShares® Barclays CMBS Bond Fund). We will give brief definitions here, for those that were not around in 2008. MBS stands for Mortgage Backed Securities and CMBS are Commercial Mortgage Backed Securities, secured by mortgages on commercial properties. One interesting thing to look at is the difference between CMBS and REITs. A simple explanation is that a REIT owns the properties, while CMBS owns a pool of loans on the properties. With MBS, banks package residential mortgages in groups into an MBS. These instruments may be important now as they are often an indicator for the strength of the property markets. We are seeing articles on problems with banks because of real estate loans made at low interest rates. What these vehicles say about this problem is interesting.
MBB does a surprising amount of volume, around 1.6 million/day. It has a similar pattern to other bond ETFs but is trading weaker than most relative to the 2020 low. One concern is that it made solid new lows in 2023 vs. other units, with the exception of TLT. Support is from 90 to 85 in layers, and resistance is the 95-area. The daily stochastic is a slight buy recycle, and the weekly is in sell mode. The stochastic pattern is better than TLT although the price pattern is worse. Surprisingly, CMBS has a better price pattern than MBB, with a double bottom in the 44-area and resistance in layers from 47 to 48. It is trading better relative to the 2020 low than MBB, certainly a surprise. The daily stochastic is in slight sell mode (but performing a bit better on a relative basis), and the weekly is overbought and not in sell mode. We show long term charts of these below, as advisors probably should not be buying these ETFs. The message here is contrarian – these suggest commercial real estate loans are better than residential.
Commodity Review (Back to top)
We discussed the oil services ETFs on last Thursday’s call and thought we would look at these here. We will look at the SPDR’s® XES (SPDR® Oil and Gas Equipment ETF), XOP (SPDR® Oil and Gas Exploration and Production ETF) and the iShares® units as well, IEZ (iShares® Dow Jones Oil Equipment and Services ETF) and IEO (iShares® Dow Jones Oil and Gas Exploration and Production ETF). The first thing to note is that XOP does the most volume in the SPDRs, and IEZ does the most in the iShares®, with XOP doing the most of all four. We will compare all of these.
First, we compare XOP and IEO. As we have seen in other instances, the least popular of these has the stronger chart. We say this because XOP is substantially below the 2014 high, and IEO is testing that high at 100, and actually exceeded it slightly in 2022. IEO has layers of support between 90 and 80, and resistance is in the 100-area. The daily stochastic is a slight sell pattern, and the weekly is in buy mode. We are not sure what the difference is in these ETFs but suspect that the reason XOP does the most volume is that it is the “cheapest”, but as we have said before, sometimes cheap is for the birds.
Second, we compare XES and IEZ. Both of these are lousy charts, but IEZ is a more attractive chart. We say this because it is through the 2019 resistance, while XES has not penetrated that area – although the difference between these two is less pronounced. Support on IEZ is 20 short-term, down to 17 longer-term. Resistance is the 15-area. The daily stochastic is a recent buy recycle, and the weekly is trying to buy recycle, but has failed so far. While the shorter-term charts of IEZ look ok, we show the Monthly charts as these charts point to the long-term trend weakness, and suggest advisors look at the short-term charts. At this point, we would use IEO for exposure to this subgroup in Energy.
International Review (Back to top)
We have been asked about some different ideas in India, and there are some Indian ETFs that are not the main indexes that are worth a look. The problem is that the patterns are similar to ones we already own. Still, advisors may want to look at EPI (Wisdom Tree India Earnings Fund) and INCO (EG Shares Consumer India). EPI trades respectable volume, but INCO is thin. Let’s look at these.
EPI is a breakout, as are the other Indian ETFs we are looking at, but it is stronger than INDA as long as trading above 40. Indeed, the pattern is closer to SMIN, and advisors should check to see the holdings in each, with your ETF desks. As mentioned, support is the 40-area breakout – if that fails to hold, 37 must hold. The daily stochastic is overbought, in slight sell mode, while the weekly is just plain overbought. INCO is a breakout above 60 or so, now support, and is more similar to but lightly weaker than INDA. The stochastic pattern is slightly weaker than INDA, and weaker than EPI but not by much. As mentioned, this is much thinner, and we probably would not use it unless you get exposure to much different stocks than INDA. You can best see the performance of these by looking at the Monthly charts, so we show those, below, and suggest looking at the daily and weekly if you wish.
Weekly Chart of Interest (Back to top)
We will take a look at PAK (Global X MSCI Pakistan Index ETF). This country, bordering on India, has a much worse chart than India, which we discuss in the International section of this report. Granted, PAK does much less volume than the Indian ETFs we use (around 8k per day). It is also a bit newer. Still, it is a pronounced downtrend since 2017, and has significant resistance from 18 to 20. It is beyond our scope to say just why this is underperforming India. However, there may not be a good enough reason to account for this. I would ask your desks – there may be an opportunity here, although the charts say it is limited so far.
