In the last quarter of 2024, semiconductors have been walking a tightrope between tariff fears and supply chain uncertainties. Geopolitical tensions between the US and China cast a long shadow over the industry, holding our proxy, VanEck Vectors Semiconductor ETF (SMH), in a consolidated range from October 2024 through January.

However, with new policies and developments in Washington, the narrative has shifted, as evidenced by SMH’s upside breakout in this weekly chart.

FIGURE 1. WEEKLY CHART OF SMH. The new narratives in DC have injected a fresh dose of optimism into the semiconductor industry, causing SMH to break out of its 3-month range.

SMH broke above resistance at the $261 level and is on its way toward testing its all-time high of $281.82.

What changed the narrative?

Four factors have likely contributed to this renewed optimism in semiconductors:

1. Tariffs on China may not be as severe as initially expected.
2. The $500 billion “Stargate” AI initiative has sent AI-related chipmakers higher.
3. The new administration’s economic policies, including tax cuts, deregulation, and increased government spending, have sparked a broad market rally, benefiting tech.
4. A renewed push for reshoring and domestic semiconductor manufacturing is seen to reduce risks, positioning US chipmakers for long-term growth.

With these factors in play, let’s examine three semiconductor stocks — Nvidia (NVDA), Taiwan Semiconductor Company (TSM), and Broadcom (AVGO) — all of which are positioned to benefit from these changes.

FIGURE 2. SIX-MONTH PERFCHARTS VIEW OF SMH, NVDA, TSM, AND AVGO.  Note AVGO’s jump in December.Chart source: StockChars.com. For educational purposes.

Using StockCharts’ PerfCharts charting tool, you can view a comparative performance of these stocks against our industry proxy SMH. All three stocks began outperforming their chip industry peers, but only AVGO made a notable jump in December.

So, let’s look at a daily chart of AVGO’s price action.

FIGURE 3. DAILY CHART OF AVGO. It’s a technically strong stock that may be due for a pullback.Chart source: StockChars.com. For educational purposes.

• Strong financial performance and significant advancements in proprietary AI tech drove the company’s 40% jump in December.
• AVGO’s StockCharts Technical Rank (SCTR) score rose above the 90-line threshold, signaling bullishness across multiple indicators and timeframes.

Yet there are signs indicating near-term weakness.

• The Money Flow Index (MFI) is declining as AVGO attempts to rally above its all-time high of $251; a bearish divergence suggesting the likelihood of a pullback.
• The Accumulation/Distribution Line (ADL) on the chart (pink line) has dropped below the price action, indicating a drop in money flow which can precede a price decline.

Nevertheless, AVGO remains a technically strong stock with a promising outlook in light of the current AI developments. If you’re considering a long position, use the Quadrant Lines to help decide your entry point. A pullback that holds within the top two quadrants signals strength and may present a solid buying opportunity. However, if AVGO falls below the middle line into the third quadrant, it could indicate weakness, warranting a reassessment of the stock’s momentum and overall bullish thesis.

Next, let’s shift over to a daily chart of TSM.

FIGURE 4. DAILY CHART OF TSM. It’s been smooth sailing, and if the advance continues, it’s crucial to find a near-term entry point.Chart source: StockChars.com. For educational purposes.

TSM is well-positioned to benefit from the developments and policy changes discussed earlier in this article. As the world’s largest semiconductor foundry, TSM plays a crucial role in AI chip manufacturing. Additionally, its expansion into the US includes new facilities in Arizona, which can help mitigate some supply-chain risks, though Taiwan remains its primary hub.

• TSM has notched an all-time high.
• Its SCTR reading is just below the ultra-bullish 90 threshold.
• Its Relative Strength Index (RSI) reading suggests steady upward momentum with plenty more room to run (before entering overbought territory).

If you’re considering entering a long position in TSM, you might wait for a retracement to the middle Bollinger Band, as it recently closed above the upper band. According to John Bollinger, the indicator’s developer, the bands should contain 88–89% of price action, which makes a move outside the bands significant.

Last but not least, here’s a daily chart of Nvidia (NVDA), the world’s leading AI chipmaker.

FIGURE 5. DAILY CHART OF NVDA. Momentum and volume are dwindling as price looks to be trading rangebound.Chart source: StockChars.com. For educational purposes.

NVDA is arguably the most favored AI chip stock on Wall Street. Nevertheless, the Chaikin Money Flow (CMF) and RSI indicate that the stock’s volume and momentum appear subdued, suggesting the market may be waiting for a catalyst to drive the next move.

While NVDA’s attempt to break above its all-time high of $153 appears to be waning, keep a close eye on support at the $130 range. A close below this, should that happen, can lead to further downside. The next level of support below that line would be near $115.

At the Close

Add SMH, AVGO, TSM, and NVDA to your ChartLists and monitor the key levels closely. Stay updated on news and policy developments from the new administration, as these could impact the semiconductor industry. While market sentiment remains bullish, watch for key technical levels and potential catalysts that could drive further upside—or signal a shift in momentum.

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

I have been traveling in the US since 1/15 and attended the CMTA Mid-Winter retreat in Tampa, FL 1/16-1/17 and then moved to Redmond, WA to work from the Stockcharts.com office this week. Unfortunately, the 40-degree (F) temp drop between Tampa and Seattle left me with a cold and a soar throat so I am skipping this week’s video.

On this daily RRG, I have highlighted the tails for XLE and XLY.

In my “best five sectors” series, XLE entered the top-5 this week, replacing XLK which was pushed down to position 6/ Consumer Discretionary still remains the no 1 sector.

The daily tail for XLE really stands out in terms of length and having both the highest RS-Ratio and highest RS-Momentum readings in the universe.

XLY rotated through lagging and has recently started to pick up again.

The reason why XLY still remains the strongest sector can be seen on the weekly RRG below.

On this time frame, XLY is deep inside the leading quadrant and rolling over as it is losing RS-Momentum, so far the loss of relative strength (RS-ratio) remains limited.

The XLE tail is another story, the rotation here suggests weakness as it is rotating back into the lagging quadrant.

The strength on the daily for XLE and the weakness for XLK have caused them to switch positions. So far that has not been very beneficial yet but time will tell.

But while the sector is now one of the best five we may as well take a look at the individual stocks and see if there are any interesting charts to be found.

Energy – XLE

The RRG (weekly) for Energy stocks shows an evenly spread universe with a bit more tails at higher RS-Ratio levels.

While checking the price charts of symbols showing strong RRG characteristics a few came out as potentially interesting.

EQT Corp – EQT

EQT is well inside the leading quadrant and recently started rolling over. However, the upward break in the price chart opened up a lot of upside potential.

A drop back towards or into the support zone between 48-50 would be an ideal time to look for buying opportunities, if we get there. Any newly formed higher low will confirm the strength of the current move.

Coterra Energy – CTRA

CTRA is somewhat similar. Here also a nice upward break out of a long sideways range which is holding up well. Any setback into the former resistance area, now support, should be seen as a renewed entry opportunity.

CTRA still has some resistance waiting around 32, the level of the 2022 peak.

Baker Hughes – BKR

From the cluster of symbols on leading or weakening around 100 on the RS-Momentum scale, BKR shows a promising chart.

The recent break above its previous high is holding up well while relative strength remains strong. The current, mild, loss of relative momentum seems temporary.

EOG Resources – EOG

EOG is located close to the benchmark with a very short tail and it has just crossed back into the leading quadrant. The upward break in the raw-RS line suggests that there is more relative upside underway.

On the price chart, there is serious overhead resistance just below 140 where several highs have lined up over the past three years. But the in-between-lows during that same period are all higher. This builds a very large ascending triangle which is generally a bullish pattern. The trigger will be the upward break above that horizontal barrier.

The long-term implications show up even better on the monthly chart for EOG

Once that upper boundary is taken out EOG will have some serious upside potential.

#StayAlert, –Julius

As the S&P 500 and Nasdaq 100 once again test new all-time highs this week, I’m struck by how leadership trends have shifted around quite a bit since mid-December.  Part of my daily chart process involves a series of ratios to better evaluate and understand which stocks are leading, which stocks are lagging, and from where the next big leadership theme may emerge.

Here are three key ratio charts that I’ve found incredibly valuable in recent years, all derived from my Market Misbehavior LIVE ChartList.  I should also note that the Relative Rotation Graphs remain one of my primary tools to track leadership rotation among the 11 S&P 500 sectors.  I feel that the charts below complement the RRG to provide a more comprehensive picture of rotation among themes and styles.

This first chart hits on perhaps the most important equity market theme in 2024, the dominance of growth over value.  The top panel compares the Russell 1000 Growth vs. Russell 1000 Value ETFs, which pulled back into mid-January before rallying again this week.  

Next we have the S&P 500 Pure Growth and Value ETFs, which ignore stocks like Microsoft Corp. (MSFT) that are “double counted” as they display both growth and value characteristics.  This chart has once again broken to new highs as growth stocks have spiked higher this week.

Finally, we’re charting a ratio of the S&P 500 High Beta and Low Volatility ETFs, which has been steadily trending higher since early September.  This provides another way to demonstrate how higher beta companies, or those that tend to experience stronger movements than the benchmark, have done better than more conservative names that tend to demonstrate less volatility than the benchmark.

Even though strategists, including yours truly, have been speaking of the “return of small caps” for quite some time, this next chart shows that investors are still waiting for that fateful day to arrive.  The Russell 2000 ETF has been underperforming its large cap counterpart fairly consistently over the last two years, and the equal-weighted S&P 500 ETF is close to a new 52-week low relative to the regular cap-weighted S&P 500 ETF.

While conditions appear to be ripe for small caps to outperform, these ratios show how the strength in large caps continues to be a key market theme.  Indeed, for the last 12 months, owning anything but large cap growth stocks most likely did not help your portfolio, with the notable exception of a rare few outperformers.  When in doubt, follow the trend.  And the trend remains favoring large cap stocks.

These next three data series represent what I call “offense vs. defense”, in that they track traditionally offensive sectors like consumer discretionary vs. traditionally defensive sectors like real estate.  With the exception of the bottom data series, showing how hotels have underperformed utilities, this chart shows that investors are still favoring “things you want” over “things you need”.

To put it another way, offense is still winning over defense.

Overall, despite a clearly corrective move at year-end 2024 into early 2025, these equity markets appear to have rotated right back to a growth-led bull market phase.  By consistently reviewing the charts we’ve discussed above, you should be able to better identify shifts in leadership and hopefully take action to better position yourself for what may come next.

For two more bonus ratio charts covering key asset allocation themes, be sure to check out my latest video on the StockCharts TV YouTube channel!

RR#6,

Dave

PS- Ready to upgrade your investment process?  Check out my free behavioral investing course!

David Keller, CMT

President and Chief Strategist

Sierra Alpha Research LLC

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.  

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

In this exclusive StockCharts video, Joe demonstrates how to use the 1-2-3 reversal pattern as a buy signal on the weekly chart. This approach can be used when the monthly chart is in a strong position. Joe shares how to use MACD and ADX to help when the trendline pattern isn’t clear, then shows the commodity charts and the shifts that are taking place. Finally, he goes through the symbol requests that came through this week, including VST, BLK, and more.

This video was originally published on January 22, 2025. Click this link to watch on Joe’s dedicated page.

Archived videos from Joe are available at this link. Send symbol requests to stocktalk@stockcharts.com; you can also submit a request in the comments section below the video on YouTube. Symbol Requests can be sent in throughout the week prior to the next show.

When you think of Cisco Systems, Inc. (CSCO), you associate the company with hardware — networking, routers, and security. However, its investment in artificial intelligence (AI) makes it a stock worth monitoring.

President Donald Trump’s announcement of the Stargate project — up to $500 billion investment to build cutting-edge AI infrastructure — is helping companies with a significant investment in AI. One stock that shouldn’t be ignored is CSCO. It may not be part of the Stargate joint venture or the first stock that comes to mind when thinking about AI, but it’s got legs.

We have covered CSCO stock in past blog articles, but with its recent price action, the stock deserves another look. CSCO’s stock price has been hitting new all-time highs of late; you likely have seen CSCO regularly appear in the New Highs dashboard panel under the ATH category. And given that CSCO’s stock price is under $100, it’s an investment to consider.

FIGURE 1. CISCO SYSTEMS’ STOCK KEEPS HITTING NEW ALL-TIME HIGHS. It’s worth pulling up a chart of CSCO’s stock price and observing its price action.Image source: StockCharts.com. For educational purposes.

A Deep Dive Into CSCO Stock

The weekly chart of CSCO (see chart below) shows that the uptrend is still in play.

FIGURE 2. WEEKLY CHART OF CSCO STOCK. The longer-term uptrend is still in play, indicating the rally has legs.Chart source: StockCharts.com. For educational purposes.

• The StockChartsTechnical Rank (SCTR) score is at around 80.
• The stock price has mostly remained above its five-week exponential moving average (EMA).
• Its relative strength index (RSI) is just above 70.

The daily chart of CSCO also confirms the positive trend.

FIGURE 3. DAILY CHART OF CSCO STOCK. After pulling back to its 50-day SMA, CSCO’s stock price reversed, paused, and is now back to rallying higher.Chart source: StockCharts.com. For educational purposes.

Between December 17 and December 23, CSCO’s stock price dipped below its 21-day EMA and found support at its 50-day simple moving average. After that, it climbed higher and stalled for several days — between December 30 to January 13. From January 14, the stock started climbing higher.

• CSCO’s performance relative to the S&P 500 ($SPX) is declining slightly. This isn’t surprising given the Nasdaq’s recent rise.
• The full stochastic oscillator in the lowest panel is above 80, putting it just into overbought territory. Remember, the oscillator can remain in overbought territory for an extended period.

Your Game Plan

CSCO’s stock price may be losing a little momentum since volume looks like it’s declining. If you didn’t take advantage of the opportunity to open a long position in CSCO, you may have another chance. The stock could dip back to its 21-day EMA. If it does and reverses with follow-through, it would be another opportunity to pick up some shares.

The bottom line: Add CSCO to your ChartList and set an alert to notify you when the stock price hits its 21-day EMA (alert provided below). Note: You can modify the scan with a different closing condition instead of the 21-day EMA.

Cisco Systems announces quarterly earnings on February 12 (see our Earnings Calendar). Volatility in the stock price could increase as earnings day approaches.

Set Alert

[symbol = ‘CSCO’]

and [close = EMA(21, close)]

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

Our strategy at EarningsBeats.com just simply makes good common sense. If you want to find the best earnings reports BEFORE they’re reported, follow relative strength. I’ve explained this many times, but let me do it again. Wall Street firms talk to management of companies throughout the quarter until four weeks before the company’s quarter ends and the extended period leading up to when a company makes its earnings announcement to the public. This prohibits anyone from gaining insider information before it’s released to the public.

Following the price action is, in some ways, gathering information prior to quarterly reports being released. But it’s legal. It provides us a sense of what the big Wall Street firms believe about a company’s prospects and those firms communicate frequently with management teams during “non-quiet periods”.

During past quarters, I’ve done studies on how company’s report earnings given their relative strength status among peers. It’s been quite obvious to me that if you are a relative leader in price performance on your charts heading into an earnings report, then odds are much greater that the company will release strong results. It’s definitely no guarantee, but in trading, we’re looking for clues that boost our odds. After 40 years of investing/trading, I’m not aware of ANY strategy that works all the time.

Bank Earnings

JP Morgan Chase (JPM) posted great results, but it was very easy to assume great earnings were coming. Why? Well, look at the chart and check out the relative strength line, which hit a 52-week high in December, the last month of Q4:

This is the definition of a leading stock within a leading industry group. Those bottom two panels are as important a clue as anything I’ve seen in determining whether a company will beat its revenue and earnings estimates. In the case of JPM, this revenue and earnings beat led to higher price action, but that’s not always the case. Therein lies the reason why buying leading relative strength stocks will not always mean a gap higher in price. There’s this thing called, “buy on rumor, sell on news” that can result in selling after a hugely bullish revenue and earnings beat. But the beats tell me to add JPM to a watch list and pounce on the buy side when it’s appropriate (breakout, pullback to support, etc.).

Our last EB Digest newsletter article from Wednesday, January 15th featured another financial stock that looks quite similar to JPM in terms of relative strength and being a leader in a leading industry group. Check out Interactive Brokers Group (IBKR), which will report its earnings on Tuesday after the closing bell:

IBKR has been strong, gaining 114.45% over the past year, but it’s relative strength keeps pushing higher and higher. It’s also a part of a very strong investment services industry group ($DJUSSB). I see another HUGE earnings report coming on Tuesday. I’m not sure whether it gaps higher or not, but if revenues and earnings beat consensus estimates, the IBKR will be saved onto a Watch List (for us, that means our Strong Earnings ChartList, or SECL). Then we could consider buying on an after-earnings pullback sometime down the road.

Weekly Market Recap

Every weekend, I recap the prior week’s action and today’s was quite interesting. After all, what do the inflation folks cling onto now? We just saw both December Core PPI and December Core CPI come in below expectations and the 10-year treasury yield ($TNX) dropped like a rock. Meanwhile, we’ve now seen the yield curve uninvert, leading to strength in banks ($DJUSBK). For a discussion about all of this, be sure to check out our YouTube video, “The Ghost of Inflation? Market SOARS on Tame Inflation Data”. While you’re there, please help us by hitting the “Like” and “Subscribe” buttons. Leave a comment and let me know if you agree or disagree with my discussion.

EB Digest – FREE Newsletter

If you’re not already an EB Digest subscriber, please register now. It’s completely FREE with no credit card required and it’s simple to sign up. REGISTER HERE to enter your name and email address and, on Tuesday, I’ll send you yet another leading stock in a leading industry group poised to deliver BLOWOUT earnings results when they report.

Happy trading!

Tom

In this video, Dave shares five charts from his ChartList of market ratios that investors can use to track changing market conditions through 2025. If you want to better track shifts in market leadership, identify where funds are flowing, and stay on top of evolving market trends, make sure to include this ChartList in your weekly market analysis routine!

This video originally premiered on January 21, 2025. Watch on StockCharts’ dedicated David Keller page!

Previously recorded videos from Dave are available at this link.

When I look back at leading industry groups for the past day, week, month, 3-month, 6-month, and 1-year periods, only one industry group has been among the Top 20 industry groups for each of those 6 different periods. It’s a group that I liked heading into 2024 and it’s a group that I still like in 2025.

Banks ($DJUSBK).

If you take a look at how banks have kicked off earnings season, then it probably makes a lot of sense why they’re so in favor. Let’s look at the bigger banks that reported quarterly earnings since Wednesday:

• JP Morgan Chase (JPM): 4.81 vs. 4.03 (actual vs. estimate)
• Wells Fargo (WFC): 1.42 vs. 1.34
• Citigroup (C): 1.34 vs. 1.25
• Bank of America (BAC): .82 vs. .77
• PNC Financial (PNC): 3.77 vs. 3.30
• US Bancorp (USB): 1.07 vs. 1.06
• M&T Bank (MTB): 3.92 vs. 3.70
• First Horizon (FHN): .43 vs. .38
• Truist Financial (TFC): .91 vs. .87
• Huntington Bancshares (HBAN): .34 vs. .31
• Regions Financial (RF): .59 vs. .55
• Citizens Financial Group (CFG): .85 vs. .83

That’s the 12 largest banks that reported quarterly earnings last week and every single one of them beat EPS expectations, but JPM did so by a MILE! This is what happens when the yield curve uninverts and the net interest margin widens for banks. I’ve said on many occasions that this is the group that will benefit immensely from an improving economy and a lower fed funds rate.

Here are the charts for banks ($DJUSBK) and the bellwether JPM:

Banks:

The most telling part of the story on this chart is told in the bottom 2 panels. Once the long-term yield began to turn higher vs. the short-term yield, banks began to significantly outperform the benchmark S&P 500 in anticipation of the strong earnings that you can see above the chart. And it just makes common sense as the net interest margin for banks can only go up with this type of interest rate environment. That’s the fundamental side, which is certainly important. However, more important are the charts, and this one remains in a very bullish pattern. Currently, we appear to have the right side of a potential cup forming. The PPO is coming off a centerline test and is gaining bullish price momentum. The AD line is back near its 52-week high. I see banks going higher from here, though we do need to see price break out above the high from late November to confirm. Our primary indicator, the combination of price action and volume, suggests trend continuation.

JPM:

This is the PERFECT example of a stock that we like to own. JPM has gained 59.57% over the past year and it’s clearly a leading stock in a leading industry group. This is the key element that powers our portfolios – lining portfolios with leaders. We started our Model Portfolio on November 19, 2018, in the midst of the trade war and a cyclical bear market. 6 months later, we started our Aggressive Portfolio on May 19, 2019. Check out our stellar performance, especially vs. the benchmark S&P 500:

The Model Portfolio’s 289% advance vs. the S&P 500’s 123% advance. That’s crazy and when you consider what we’ve had to navigate these last 6+ years, it’s even crazier! We’ve endured the 2018 trade war and resulting cyclical bear market, the 2020 pandemic and resulting cyclical bear market, and the 2022 cyclical bear market, along with the worst inflation since the 1980s. That’s 3 bear markets, each falling 20% or more, in just over 6 years. No one consistently outperforms the benchmark S&P 500 like this, unless you follow our time-tested portfolio strategies. They don’t outperform every quarter (who does?), but these 6-year results speak for themselves.

Q4 Earnings

Earnings drive our portfolios. A company will never be included in our portfolios UNLESS it beats its latest quarterly revenue and EPS estimates. This isn’t a preference, it’s a MUST.

Earnings last week were, in most cases, WAAAAAY ahead of consensus estimates. Bank stocks have kicked this earnings season off in a very bullish way. But there’s another group, and you won’t believe which group it is, that is setting up to deliver BLOWOUT quarterly results, most likely better than banks. I’ll give you the group and one of its key stocks in our Tuesday EB Digest newsletter. I believe this elite company is set to report revenues and earnings way above current expectations. If you’re not already a FREE EB Digest subscriber, simply CLICK HERE, enter your name and email address, and join the tens of thousands of traders/investors around the globe! Make a difference in your trading in 2025!

Happy trading!

Tom

Energy Replaces Technology

At the end of this week, 1/17/2024, the Technology sector dropped out of the top 5 and will be replaced by Energy. The ranking in the top 5 has also changed. XLY is still number one but XLF raised to the #2 spot, pushing XLC down to #3.

XLI rose to #4 and, as said, XLK dropped out of the top 5 to #6 while XLE moved up to the #5 spot entering the portfolio.

1. XLY – Consumer Discretionary
2. XLF – Financials
3. XLC – Communication Services
4. XLI – Industrials
5. XLE – Energy
6. XLK – Technology
7. XLU – Utilities
8. XLRE – Real Estate
9. XLP – Consumer Staples
10. XLV – Health Care
11. XLB – Materials

I started adding the ranking for all sectors so it will be easier for us to monitor which sector or sectors are picking up and make a chance to enter the top 5.

Weekly RRG

On the weekly RRG, XLY, XLC, and XLF remain firmly on the right-hand side of the graph despite their loss of relative momentum, which is causing the tails to roll over.

XLI has now crossed over into the lagging quadrant while XLE has started to hook back to the right on the edge of the lagging and the improving quadrants. The Technology sector remains inside the improving quadrant but is not able to make a real push for leading.

Daily RRG

The bigger shifts become visible on the daily RRG. XLE shoots into the leading quadrant while Technology moves opposite and enters the lagging quadrant. Combining these moves with the weekly RRG has caused the switch of positions for these two sectors.

The improvement of Industrials and Financials has pushed them up in the ranking while the weakness of Communication Services led to a drop, while still inside the top 5.

The strength of Consumer Discretionary remains, mainly from its strong position on the weekly RRG. The curling up of the daily tail will only help the sector remain inside the top 5.

Consumer Discretionary

The strong move higher this week could well establish a higher low and confirm the existing uptrend. Despite a small loss of relative momentum, with the green JdK RS-Momentum line dipping, the RRG lines remain firmly above 100, keeping the sector inside the leading quadrant.

Financials

This week’s strong move higher took XLF back above the rising support line which it threatened the last few weeks. The higher low is now in place and the raw RS-Line got a push in the back and bottomed out around the breakout level from the sideways range.

Communication Services

This sector held up well but is still back inside the boundaries of the rising channel. I am not the biggest fan of such moves but stepping aside and looking with a fresh eye this may well evolve into a flag-like pattern. Following the RRGv1 strategy, this is still one of the stronger sectors.

Industrials

Price bottomed out exactly against the rising support line after completing a small bottom formation. It now has plenty of upside room within the rising channel, and the RS line has put in a higher low, albeit shallow.

Energy

The Energy sector is the new kid on the block. On the price chart, XLE jumped from the lower boundary and is now underway to horizontal resistance around 98.50.

The raw RS-Line remains within the boundaries of its declining channel, keeping the weekly tail on the left-hand side of the RRG plot. The recent strength in the sector pushed the daily tail deep into the leading quadrant, far ahead of all other sectors. The combination of weekly and daily tail positions pushed XLE above XLK, entering the top 5 portfolio.

Performance

The performance of the best 5 sectors at the end of last week was 2.73% vs. SPY 2.21% (measured against the start of this experiment), hence a 0.52% outperformance. I will update the portfolio, adding XLE and removing XLK, against the opening prices of next week (which will be Tuesday!!!).

A note on weights

So far I have used equal-weight positions for this portfolio of the best 5 sectors. But while doing more research and running more tests I realized that that is not the correct way to do it.

Don’t get me wrong, the strategy works and the outcomes using equal-weight positions are historically positive, but there is a flaw.

This is best explained using the technology sector as an example. At the moment XLK makes up 31.6% of SPY.

So when I add XLK to the portfolio at 20% I am still UNDERWEIGHT 10% against the benchmark. In other words, when XLK is in the top 5, meaning it is one of the best 5 sectors, in the portfolio I am still 10% behind the benchmark and XLK is not able to contribute to the performance as much as it should.

On the other end of the spectrum is XLRE at 2.1% of the benchmark. So when I add that sector at 20% I am almost 10x overweight.

Compare that to the 10% underweight for XLK, and it’s not hard to understand that such a weighting scheme causes all kinds of shifts in this strategy’s risk-reward profile.

For now, I’ll continue with the equal weight scheme while working on a more dynamic weighting scheme based on the benchmark weights of the sectors that made it into the top 5.

Have a great weekend and #StayAlert. This week’s article is coming from Tampa, FL where I attended the CMTA mid-winter retreat. Next week I will be working from the Stockcharts.com office in Redmond, WA –Julius

In this edition of StockCharts TV‘s The Final Bar, Dave sits down with Ralph Acampora, CMT, co-founder of the CMT Association, for a memorable conversation on all things technical analysis. They review lessons learned from the October 2022 market low, words of wisdom for traders new to technical analysis, and what a long-term chart of the bond yields can tell you about interest rates in 2023.

This video originally premiered on September 14, 2023. Watch on our dedicated Final Bar page on StockCharts TV, or click this link to watch on YouTube.

New episodes of The Final Bar premiere every weekday afternoon LIVE at 4pm ET. You can view all previously recorded episodes at this link.