High beta stocks recently hit a wall of resistance – and lost.
The theme of many of our equity posts over the past 2-3 weeks has focused on the approaching (or present) considerable price resistance on the charts of most major, and minor, indices. Not surprisingly, the post-February rally has shown signs of slowing down recently as this resistance has come into play. Even if the market is in the early stages of a longer-term rally, a pause here would not be unexpected. The nature of the price reaction here, however, should tell us whether it is merely that – a pause – or the end of the line for this rally.
One development that would go a long way toward the “merely a pause” scenario, would be a breakthrough of these resistance levels among some of the more beaten-down and speculative areas of the market. Such a development would suggest the potential of a rotation of new leadership from the more defensive areas to the more “risk-on” areas of the market. This could give the rally the jolt of energy needed to propel it on to a new, durable leg of advance.
But while we have seen several examples of indices poking their heads above these resistance levels, they have not been of the “risk-on” variety. On the contrary, these more speculative areas of the market have been soundly rejected by their respective lines of resistance. Included among them is the “high beta” area, as represented by the PowerShares S&P 500 High Beta ETF, ticker SPHB.
As the chart indicates, the last few weeks have seen the SPHB encountering several levels of meaningful potential resistance on its chart, including the:
- Post-2011 UP Trendline
- 200-Day Simple Moving Average
- 50% Retracement of the April-February Decline
- 12/31/2015 & 1/5/2016 Breakdown Gaps (now filled)
- 12-Month Down Trendline
Again, the SPHB was soundly rejected at the resistance levels listed. Furthermore, instead of hanging close to those levels, the ETF has continued to sell off in recent days, now sitting some 5% below the upper levels of resistance.
This does not necessarily spell the end of the line for high beta stocks or the post-February stock market rally, in general. Perhaps they will get a dose of “risk-on” cortizone yet that will propel these stocks to new rally highs above the listed resistance. However, the first attempt was a feeble one and the reaction since has been uninspiring as well.
If the post-February rally is to include another leg higher, it would be a great help if these higher beta areas would step up and pull their weight. A good start toward that effort would be overcoming the aforementioned area of resistance – and doing so before leaking too much more fuel.
More from Dana Lyons, JLFMI and My401kPro.
The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.