The Modern Family: How You Can Stay On The Right Side of The Market

Welcome to my “Modern Family” market analysis!

This is an entertaining yet professional way for you to anticipate the market’s next move with confidence.

The Modern Family is a combination of one market index and 5 varying sectors and groups. Together these provide a succinct way to assess where the money is flowing in the market.

When you follow the relationship among these family members you’ll clearly see where the overall market is heading next

How Can Something So Simple Work So Well?

The Modern Family gives you an overall gauge of how aggressive or not to be on the long or short side.

I like to focus on the discrepancies of the Modern Family sectors along with the Russell 2000. This helps with finding patterns and making connections they show you what is really happening in the market.

Point is, my “Family” perfectly illustrates just how the dance between the Bears and the Bulls endures.

Who Are the Members of the Family and What Are Their Roles?

The Russell 2000 (IWM), is where I look to determine the direction for this particular index. It is a leading indicator for how much follow through the other 3 major indices (SPY, QQQ and DIA) might experience.

This index represents 2000 small cap stocks, so it is an excellent way to gauge the health of many companies that manufacture and distribute goods and services within the United States. The Russell’s are “Granddad!”

Not that IWM stands alone. Grandma is the Retail sector (XRT) – after all, she controls the family budget. As a measure of the U.S. economy and consumer confidence, the Brick and Mortar Retail sector has to keep up with the indices for sustained rallies.

Brother Regional Banks (KRE), well, he acts like the Prodigal Son.

Regional Banks are a key sibling in the Modern Family because they measure the health of not only the financial system in the U.S., but also the overall health of the Regional Banks, where many local folks put their money.

KRE is a reliable indicator of what the Federal Reserve might do regarding raising interest rates, and how consumers are behaving concerning saving and borrowing habits.

Our Prodigal Son got his name for his reputation as a lavish over spender. Once KRE overdoes it, the sector will return to investors seeking forgiveness.

The tran sibling, Transportation (IYT) is called such because he/she is ever changeable. A reliable measure of the supply versus demand, IYT tells us if goods are moving or not. What we do not want to see in a strong economy, is for supply to outweigh demand. IYT tells us about that relationship, hence, about the health of the US economy.

Charles H. Dow, co-founder of Dow Jones and Company, was alive during the Industrial Revolution, a time when the U.S. was a growing power. Dow’s first stock averages were an index of industrial (manufacturing) companies and rail companies. To Dow, a bull market in industrials could not occur unless the railway average rallied as well, usually first.

We have come a long way since Mr. Dow, however, as an accurate measure of the U.S. economy, trains, planes and automobiles have merit.

Biotechnology (IBB) made the cut for good reasons. As the anointed “Big Brother” since beginning its ascent in 2010, it is a great way to assess where speculative money is flowing.

As one of the most highly speculated sectors, if IBB is bullish, that is an excellent indication that the investor sentiment is also bullish. Conversely, should buyers abandon biotechnology, it can be an early warning that sentiment is changing, and investors prefer to sit on the sidelines.

Last but not least, there’s the super smart and chic Semiconductors (SMH). We call her “Sister Semiconductors.” The U.S. semiconductor industry has been a major innovator among all U.S. industries.

Economists estimate that all productivity growth during the current decade will likely be generated by IT – using IT and IT producing industries.

According to the analysis of data from the U.S. Bureau of Labor Statistics (BLS), the U.S. semiconductor industry now employs almost 250,000 workers directly and supports more than 1 million additional jobs throughout the broader U.S. economy. These supported jobs do not even include the millions of downstream electronics jobs in the U.S. that semiconductors enable.

How Does The Rotation of the Modern Family Keep You On The Right Side of the Market?

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Above is a chart of all six Modern Family Members to illustrate how the “drama” among RetailSemiconductors, Biotechnology, Regional Banks and Transportation, all under the watchful guise of the Granddaddy Russell 2000s plays out.

The gray boxes purposely hide prices as I do not want you to see what’s coming next.

The Russell 2000 (IWM) as of mid-April, makes a new low. At the same time, Retail (XRT) does not make a new low, yet on the rally in April, cannot post a lower high.

Regional Banks struggle under the 50-dayMoving Average (represented in the dark blue line).

Semiconductors (SMH) and Biotechnology (IBB) are holding up near recent highs while Transportation (IYT) is above its 50 DMA, but lagging behind the other siblings.

In summary, 5 out of the 6 are in Bullish Phases. Will everything move higher from here?

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One month later or in early May, the Russell 2000 (IWM) breaks out. Except for (IBB) which consolidated near its recent highs, every other member of the Modern Family continued to rally.

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From the last chart until the one above showing the Modern Family in mid-May, the Russell 2000 (IWM) rallied another 5%! Every member of the Modern Family kicks into gear.

Now you can see how the Modern Family provides an overall gauge of how aggressive be on the long or short side. In the above scenario, we can trade more confidently from the long side as a Family that trades together tends to stay together.

Why is The Russell 2000 The Patriarch?

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A completely different year, in the chart above, the Russell 2000 (IWM) is near new highs and about to break out. Yet, looking at the other members of the Family, Regional Banks (KRE) and Retail (XRT) have respectable charts while Biotechnology (IBB), Semiconductors (SMH) are both in warning phases (trading under the 50 DMA or dark blue line and Transportation (IYT) struggles trading under the 200-day Moving Average or green line.

Would you buy the new high breakout in IWM?

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The warning signals of Biotechnology (IBB), Semiconductors (SMH) and the further weakness of Transportation (IYT) were reliable indicators for not buying the Russell 2000 (IWM) on the highs. Subsequently, IWM had a new high failure.

Incidentally, the first round of charts showing a bullish setup was from 2013. The next round of charts are this year, 2015.

Are There Other Factors to Gauge Market Direction?

Naturally, the Modern Family has cousins, in-laws, babies, grandkids, etc. These influences are typically duly noted in the Mish’s Market Minute Daily commentary, and can go counter to the core family members offering their own unique trading opportunities.

To date, though, the best overall indicator of the macro picture in the U.S. market remains the 6 members of the Modern Family.