The S&P Restaurants Index has been a long term outperformer. This is set to end, although the timing is not yet clear.
S&P Restaurants Index versus S&P 500 Index
- The 40 and 50 week moving averages crossed in August 2003
- They stayed in bullish alignment until the negative crossover in September 2012
- This comfortably qualifies for my criteria of finding averages that have not crossed for four years, to give a good chance of reversion
Since August 2012, the chart has traded sideways. This is a good example of why long term moving average crossovers show that something has changed but don’t give the timing of the move.
For timing, I would use my Bollinger Band breakout method. I prefer breakouts that occur soon after a tight band contraction, whereas bands that have been contracted for ages are less useful. The band width can always be adjusted to give this but the key is; there should be a track record of that band width giving good signals.
S&P Restaurants Index versus S&P 500 Index (70 week Bollinger Bands)
Here, the 70 week bands have recently contracted but the shorter bands would have dribbled and stayed together. There isn’t a track record for the 70 week bands to examine, so in this case, maybe just going with a decisive support break will have to be the signal.
Sectors against the S&P Restaurants Index
A few sectors set up in a similar way to the S&P 500 Index, they are:
S&P Food & Staples Retailing
S&P Health Care
Inverting the chart..
S&P Food & Staples Retailing Index versus S&P Restaurants Index
Watch for a break above the range that has been in place since August 2012.
On first look, I didn’t find any of the larger cap restaurant stocks (those in the SPDR Consumer Discretionary XLY) that closely matched the sector chart. This will need another look for good candidate stocks and good stocks for the other side of the pair.
I have shown on many occasions that divergences on the 14 day RSI can be a good reason to remove a position, although they are insufficient to warrant opening a position.
Recently, I opened a short position in Hormel Foods (HRL) v SPDR Consumer Staples (XLP). This showed a bullish divergence on its 14 day RSI on 12 November. The ratio rallied the rest of last week.
The stop loss on this position is moved to break even. Longer term, there was a bearish divergence on the 14 week RSI and Performance Rank, which prompted the short position.
That long term divergence may still take effect and bring further underperformance of its sector for Hormel Foods, I just don’t want a profitable trade becoming a loss even in the short term, hence the move of the stop loss. If stopped out, the pair could still be shorted on a reassertion down but that may not fit one of my defined trade set ups.
International Flavors & Fragrances (IFF)
On 28 October, I showed the bullish daily divergence on IFF versus SPDR Materials (XLB) and gave it as a reason to take some profit. Well, look what happened since then!
On Monday, I showed the chart of Hess Corporation (HES) versus SPDR Energy (XLE) with its entry criteria, on the condition that the results announcement would have passed.
The price fell 3.8% on the results announcement yesterday, giving the entry signal that I set out.
There will probably be some sort of short term recovery, possibly for a week or two. As far as my trading record for this blog goes, I will open the short position in the pair at yesterday’s close of 0.92652. The stop loss is above the 21 October high of 0.97054, 4.8% higher. I’ve shown the idea but I can’t micro manage too much.
Today, Owens-Illinois (OI) has an earnings announcement. I don’t like holding positions into earnings, so the short position versus SPDR Materials (XLB) will be closed for a very modest 1.1% profit. It can always be opened again after earnings if the trend resumes, the medium term set up is still in place.
Here is another Performance Ranking (PR) method example, this time using a component of the SPDR Consumer Staples (XLP). These can be found in any sector if you have the list of components of a tradable sector benchmark. There is plenty of scope for using this method.
The chart of Hormel Food Corp (HRL) vs XLP shows a bearish divergence on its 14 week RSI. HRL also has a bearish divergence on the Performance Rank – the rank of its price performance within the components of XLP.
There was bullish RSI and PR divergence at the August 2012 relative low for HRL (dashed line).
- The chart shows three instances of daily RSI divergences marking turning points
- There was not a perfect match to my RSI divergence criteria at the high but weekly criteria are more important
- After two months, the ratio has broken below a top formation
The next results release for HRL is on 26 November.
A short position in HRL vs XLP will be opened if a new end of day low below the 21 October low (blue arrow) is made. That will be today if early prices hold. The stop loss will be above the 22 August high (last dashed line), 3.2% higher.
In early September, I set up some Performance ranking (PR) trades in the materials sector. I opened a short position in International Flavours & Fragrances (IFF) vs SPDR Materials (XLB) on 05 September.
There is now a bullish divergence on the 14 day RSI, although no rally yet to say that a low has been reached. The pair has gained 4.7% so far.
I have identified bullish daily RSI divergences as a reason to take profit, but not good enough as an entry criterion – that required weekly divergences.
Therefore, I will take half of the position as profit and move the stop loss to break even.
The short position in Owens Illinios (OI) vs SPDR Materials (XLB) makes modest progress, a 2.3% gain.
Last week, I showed the chart of Hess Corporation (HES) versus SPDR Energy (XLE) with a bearish divergence on its 14 week RSI and on the Performance Rank (PR) amongst the components of XLE. Here is the updated chart.
The first of the three criteria I stated last week – a move of the weekly RSI below 70 has happened.
- The second of the criteria has been met – a break of the trendline
- The last criterion is a move to a new 14 day RSI low, below that of 12 September (purple arrow)
- I will add to that, a daily close of the pair below the 15 October low (blue arrow), taking the pair to a new low since 01 October
On those two events, a short position in HES v XLE will be opened, with a stop loss above the 21 October high. That is only 1.5% higher than the 15 October level, so quite tight.
Hess Corporation has an earnings announcement on 30 October. I’d like to get past that before opening a position. Previously, I have opened positions before earnings, then the reaction has negated the entry signal.