Sunday, September 15, 2013

X Sectors May Be Topping..9.15.13

The markets have enjoyed a nice little run recently, but technicals are arguing for close attention to stops as overbought conditions continue to develop (note the SPY TrendX in the right side panel). 
Energy and materials have led the latest run as reflected in XLE and XLB, although the industrials (XLI) have been the recent surger.
Note the little equity curve (blue line) reversal currently underway on the 3 month chart...another sign that a trend reversal might be around the corner.
At a more technical level here's the view using the latest P6 series of charts based on the TrendX and a % change pair study of the SPY versus XLU.
The current pullback in the lower left TrendX chart (above) is one more indication of possible momentum weakness. 

There have been a number of queries about the pairs chart.....what does it mean and why should I care?
Next week we'll look at answers to those questions and more.  Basically, we want to see if the momentum leaders (and laggers) are exhibiting volatility patterns in line with historical norms.  If not, then we need to try and determine how the current skew may be of use in forecasting possible reversions to those norms.

Here's a snapshot of the current SPY/XLE pair over a 6 month lookback period using the MO2 analysis just as an example of the type of analysis I'm refering to.: