It was not surprising that stocks sold off on Monday morning after a tumultuous weekend. What was interesting was that as the major averages were making their lows for the day the NYSE advance/decline numbers revealed that there were not that many more sellers than there were buyers.
By the close of trading, even though the S&P 500, Dow Industrials and NYSE Composite closed the lower there were more advancing then declining stocks. This was a positive sign that hinted at the market's strength on Tuesday.
The financial media has turned more cautious on the stock market in January and last week according to AAII the bullish% dropped 6.6% to 37% consistent with waning enthusiasm over the Trump rally. I think this may change this week as Tuesday's action, with almost 3-1 positive market internals, indicates that the election rally may be ready to continue.
As the Spyder Trust (SPY) has been moving sideways and the iShares Russell 2000 (IWM) has been declining some ETFs have had nice gains. The weekly relative performance analysis from Viper ETF has been positive since last November for both the SPDR S&P Metals & Mining (XME) and First Trust Dow Jones Internet (FDN). They are up 8.8% and 6.1% respectively in 2017.
In Tuesday's trading there were strong moves in both the iShares US. Home Construction (ITB) and SPDR S&P Homebuilders (XHB) but are these two ETFs now on the verge of becoming market leaders?
The SPDR S&P Homebuilders (XHB) has an expense ratio of 0.44% with 44 holdings. There is over 61% in the top ten with over 23% in D.R. Horton (DHI) and Lennar Corp (LEN ) that were both sharply higher on the day.
The weekly chart of ITB shows there is weekly resistance in the $30 area, line a. A strong move above this level will project a rally to the $33-$35 area.
- ITB traded in a tight range for the previous four weeks as it held the 20 week EMAS which is now at $27.70. These are often good buy setups.
- The weekly relative performance has broken its downtrend, line b and a close this week above the late 2016 high will complete the bottom.
- The weekly OBV is just barely above its WMA but volume Tuesday was double the daily averages.
- The daily OBV (not shown) does look strong and has broken out of its recent trading range.
The SPDR S&P Homebuilders (XHB) has an expense ratio of 0.35% with 35 holdings. The largest are Whirlpool (WHR), Mohawk Industries (MHK) and Home Depot (HD). This ETF has positions in many of the homebuilders but also contains a wide range of home furnishing stocks.
- XHB also gapped higher Tuesday and closed above the daily starc+ band.
- The December high is at $35.54 and the weekly starc+ band at $36.75. The resistance from 2015 is at $38.
- The daily RS has moved strongly above its WMA and is now close to its downtrend, line e.
The daily OBV has moved above its downtrend, line f, on Tuesday as volume was well above average.
- The weekly OBV is positive as it is above its WMA.
Summary: On Tuesday the iShares Russell 2000 (IWM) closed strong Tuesday and a close above $137 will indicate its correction is over. This will provide a bullish boost for the overall market. It will take a another day or two of positive A/D to turn the Russell A/D line positive. Given the recent increase in bearish strategies, including the reportedly heavy buying of VIX calls, a new rally would catch many by surprise.
As for the iShares U.S. Home Construction (ITB) and SPDR S&P Homebuilders (XHB) the daily close above the daily starc+ bands indicates that they are now in a high-risk buy area. This typically means there will be a better risk entry in the next week.
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