EB Daily Market Report - Wednesday, September 25, 2024

Our major indices are mostly lower as 9 of 11 sectors are down today, including a very weak energy group (XLE, -2.01%. Crude oil prices ($WTIC, -2.66%) have fallen back below $70 per barrel and that is sinking the energy group as a whole. During our Live Trading Room this morning, I pointed out the strong positive correlation between crude oil prices and energy shares. Here's a quick illustration:

Key support on the $WTIC is from $62-$70 per barrel. Should this support range break down, the XLE could see considerably more selling. Otherwise, I'd look for the XLE to develop a solid price support area as we head towards Q4.

The blue-shaded area above illustrates the very strong positive correlation between the $WTIC and XLE. The overwhelming majority of time is spent in the positive correlation range from 0.50 to 1.00. That tells us that wherever one of these two moves over a 20-week period, the other is very likely to move in that same direction. So if energy ETFs or stocks interest you on the long side, you'll want to make sure the $WTIC support range from $62-$70 holds.

Next, growth has absolutely been leading value in recent sessions, but I wouldn't just assume this will continue. I believe many value-oriented areas of the market are seeing a bit of profit taking after breaking out and advancing strongly. Check out the current technical look of the following:

XLV:

Pulling back after an extended uptrend to reset momentum oscillators is a completely different animal than trending lower beneath key moving averages. The XLV is healthy, despite its recent absolute and relative underperformance.

XLI:

We're showing a possible reversing candle today on the XLI, but make no mistake about it, this is a leading group and has been since the 2nd week of July.

XLRE:

Real estate has been on FIRE since the July gap higher and really hasn't looked back. Taking some time off in the near-term and allowing money rotate into other sectors would not be a bearish development at all. It would be a normal development (profit taking).

XLP:

Consumer staples (XLP) had been outperforming consumer discretionary (XLY) by quite a wide margin during the recent rally, but that has changed:

Here are my final thoughts after looking at these charts. If we see continuing profit taking and relative weakness short-term in value-oriented areas, then the S&P 500 will only hold up IF technology sees further rotation into that sector. If that doesn't happen, then I'd expect to see the overall market have one more weak period. If technology can continue to rally, then a significant selloff (more than 5%) grows more and more unlikely.

I remain short-term CAUTIOUS, but long-term VERY BULLISH.

Happy trading!

Tom