The big story this week is the newfound strength in the Nasdaq Composite -- up 3.68%. Last week the Nasdaq was down -1.33%.
The Dow Jones continues to show weakness versus the other averages, although this week it was off just -0.15%, an improvement from the -0.75% it was down last week.
The S&P 600 (SML), our small-cap proxy, is the only one of the major averages to have gained two weeks in a row. (Last week it was up about half a percent.)
(The iShares Core S&P Small-Cap ETF (IJR), our bullish play on the S&P 600 from last week is up +1.68% after 5 trading sessions. Our play on the Russell 2000 (iShares Russell 2000 ETF (IWM) -- is up +0.87%.)
Our #1 indicator/risk barometer, the New York Stock Exchange Bullish Percent Index (NYSE BPI) is almost where we left it last week.
The chart is still in a column of X's (meaning the market should be considered strong in the short term).
And it is still on a point-and-figure "Buy" signal -- meaning the market should be considered strong in the intermediate- to long-term.
There is one difference from last week.
The NYSE BPI shows what percentage of stocks trading on the New York Stock Exchange are currently on (point-and-figure) Buy signals on their respective price charts.
On July 24th that percentage stood at 58.17.
Today it stands at 57.34. So we've seen a net reduction of 0.83%. Less than one percent. A bit of a softening, but nothing to write home about.
We're seeing a similar mild weakening in the "internal market".
You can think of the major averages -- the Dow, the S&P etc. -- as the "external" market. They're the things your Uber driver thinks of when they hear the words "stock market".
You and I take a more sophisticated view. We know that the market is really made up of dozens of smaller "mini markets". They're called "sectors" or "industry groups".
At True Market Insiders we break the market into 45 such mini markets.
And we determine each sector's status by tracking its BPI chart. When a sector's BPI is in X's (strong in the short-term) we say that the bulls are in control of that sector, and we color it blue on an indicator called a U.S. Industry Bell Curve.
When a sector's BPI is in O's (weak in the short term) we say that the bears are in control of that sector, and we color it red on the same Bell Curve.
The complete Bell Curve shows us the "breadth" of the market.
Last week the Bell Curve (Sector Breadth) looked like this.
That image (courtesy of our Premium data product, Sector Prophets Pro) tells us that last week bulls controlled 34 sectors -- 76%.
Today, the Curve looks like this:
The bulls now control just 31 sectors. The bears have taken control of 3 more sectors.
So the market has softened, but not by much.
Let's go one layer deeper into the internal market. Let's look at which sectors are the strongest right now.
("Right now" are very important words. We're not going to try to guess or predict what the future holds or what the market is about to do. Instead, we use our tools to see as clearly as possible what is actually happening... right now.)
Here's a snapshot showing the top portion of the Sector Relative Strength Matrix. This tool lets you see all 45 sectors ranked from strongest to weakest.
Right now the 10 top-ranked sectors are:
1. Protection Safety Equipment
2. Precious Metals
3. Leisure
4. Retailing
5. Semiconductors
6. Metals Non-Ferrous
7. Electronics
8. Restaurants
9. Software
10. Healthcare
At the other end of the relative strength picture we have the weakest sectors.
Right now the 10 lowest-ranked sectors are:
1. Insurance
2. Textiles Apparel
3. Steel Iron
4. Media
5. Banks
6. Savings and Loans
7. Oil & Coal
8. Aerospace Airlines
9. Drugs
10. Biomedics Genetics
Again, we never try to predict where the market or a sector or a stock or ETF is headed. We can't tell the future.
But we do know that "a body in motion tends to stay in motion". Meaning, a stock or sector that's outperforming will tend to outperform going forward.
It's obvious that the smartest move is to choose stocks and ETFs from the strongest sectors (if you're looking to get bullish)...
And to short (or buy Put options) on stocks and ETFs from the weakest sectors.
You don't have to restrict yourself to the very best and very worst sectors.
As we saw a moment ago, the Semiconductor sector is ranked #5 out of 45 sectors. That's plenty strong for our purposes.
Semiconductor ETFs invest in companies that design and manufacture (or "fabricate") semiconductor devices, things like transistors and integrated circuits.
Recent trends such as Cloud Computing, Artificial Intelligence and 5-G Wireless have provided strong tailwinds for the sector.
The SPDR S&P Semiconductor ETF (XSD) looks to match the performance of the S&P Semiconductor Select Industry Index.
This ETF is equal-weighted. That means that, unlike some other ETFs in the Semis space, it doesn't overweight giant companies (such as Intel) and for that reason tilts toward smaller growth companies.
This is a great ETF to own when Semiconductors are hot and when small-cap stocks are hot as well.
For years now Technology has been the dominant major (broad) market sector. This ETF has benefited from that strength, gaining 250% since 2016.
And the ETF is not overbought. Its RSI reading, at 60.94 (short blue arrow), is well below the 70 overbought threshold. This fund has room to run.
At $121.80, owning XSD directly might be a pretty pricey way to get bullish on Semiconductors.
A less expensive alternative is to buy the January 2021 102 Strike Call Option.
The option has a mean price between the bid and ask of $23.75.
So you can control 100 shares of XSD for a fraction of what you'd spend to own shares outright.
And there you have it -- a recipe for chasing down a high-probability play in a hot sector.
If you want to take a VERY deep dive into spotting winning stocks -- go here and watch this replay of Chris Rowe's investment training from earlier this week.
We were going to take the replay down, but our tech team says that demand for it is extraordinarily high.
Makes sense, seeing as how people want to get well-positioned ahead of the coming election.
Chris' presentation will help you do that.
See you soon.
Bill Spencer
Editor-In-Chief, True Market Insiders
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