Russell 2000 (IWM) "Grandpa" - This index represents 2000 US domestic small cap stocks, an excellent way to gauge the health of many companies that manufacture and distribute goods and services within the United States.
Retail sector (XRT) "Grandma" - Mainly Brick and Mortar Retail-she controls the family budget. Almost 70% of the GDP is driven by consumer spending so it\'s an excellent measure of the strength of the U.S. economy and consumer confidence.
Regional Banks (KRE) "Prodigal Son" - Banking sector, often lavish, then contrite when it oversteps costing Americans dollars. Regional Banks measure the health of the financial system in the U.S., where many local folks put their money.
Transportation (IYT) "Tran" - Good indicator of economic health as the movement of goods and services across the country is the lifeblood of the economy. Relates back to Charles Dow and his emphasis on tracking Transportation as a way to measure industrial and manufacturing strength-supply and demand.
Biotechnology (IBB) "Big Brother" - Biotech, highly speculated, assesses where money is flowing. If speculators are confident, they will park money here.
Semiconductors (SMH) "Sister" - Semiconductor industry is on the forefront innovation and a major player in many of the strongest technology trends.
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?
Above is a chart of all six Modern Family Members to illustrate how the “drama” among Retail, Semiconductors, 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?
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.
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?
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?
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.
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The Russell 2000 is the best measure of the health of the U.S. economy. The ETF IWM is the financial instrument that represents the direction for this index. It is a leading indicator for how much follow through the other three major indices (the S&P 500 (SPY), NASDAQ 100 (QQQ) and the Dow Jones Industrial Average (DIA) might experience. This index represents 2000 small cap stocks, which manufacture and distribute goods and services primarily within the United States.
The Russell's are "Granddad!" With 2000 stocks in this index, companies such as La-Z-Boy, World Wrestling Foundation, Crocs, Frontline, and Smith and Wesson, represent the "meat" of the U.S. economy.
Granddad guides you to observe how the "meat" of the U.S. small cap companies is performing. This information, allows you to assess independently and effortlessly the pulse of the economy and the market. However, the IWM does not stand alone.
Grandma is the Retail sector (XRT); after all, she controls the family budget. As 70% of the Gross Domestic Product (GDP), Granny Retail tells us whether consumers are out there doing their part to stimulate the economy.
As an accurate measure of consumer confidence, the Retail sector must keep up with or lead the indices for sustained rallies. That makes Granddad and Grandma a perfect pair. If they are both performing well, most likely so is the overall market. If they are both feeling poorly, that is extremely helpful information. If they are going in opposite directions, take that as a sign of caution.
Granny Retail is in a "typical" mall within the United States. Stores such as Nordstrom's, GameStop, Wal-Mart, Costco, TJ Maxx and O'Reilly Automotive, XRT consider the shopping habits of most U.S. consumers.
Granddad and Grandma have four grownup kids.
Brother Regional Banks (KRE) is the Prodigal Son. He has periods of wastefulness coupled with periods of high productivity; KRE tells us the borrowing and saving habits of the American consumer.
Regional Banks is a key sibling in the Modern Family because he measures the health of the U.S. Regional Banks, where many local folks put their money. In the cartoon, KRE, the Prodigal Son stands in his office at a Regional Bank. He tends to be Bullish on America. He leans on his desk for support. He's always ready to ask for forgiveness just in case he cannot do right by his customers. His cat (or one might say KRE's alter ego), on the other hand, has unabashed confidence that whatever the Regional Banks do is always the right thing at the right time.
KRE is a reliable indicator of what the Federal Reserve might do regarding raising or lowering interest rates. It also helps market analysts calculate consumers saving and borrowing habits. Regional Banks has a Transgender sibling.
In the cartoon, Transportation (IYT) is transgender because IYT is a variable and ever-changing element of the US economy. In today's world, the nature of how goods and services move through the economy is shifting with e-commerce and the internet. Nonetheless, how IYT is behaving continues to be very important. Our Trans is an airplane pilot who is also skilled at truck driving and freight train conducting. He/she will bring you the "goods" via trains, planes and automobiles.
If we go back in time, Charles H. Dow, co-founder of Dow Jones and Company, observed the patterns of what occurred in the markets during the Industrial Revolution, when the U.S. was a growing power. The Dow Theory originated from his observations. The Transportation Index is a key component. 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 Dow's Theory on how goods and services move. However, the notion of how much and how fast goods move throughout the country remains a critical measurement of the U.S. economy.
Biotechnology (IBB) made the cut for good reasons. As the anointed "Big Brother" IBB is a great way to assess if, how and where money flows into the market.
Big Brother has many functions in the United States. He represents the pharmaceutical companies because of the power they have over us as consumers. Our current health and future well-being rely on Big Pharma. Big Brother wields power in Washington D.C. as well. All the IBB holdings appear in NASDAQ. Leading medical research requires speculative funds, and if speculative funds are coming into the market, that helps rounds out the Family.
IBB serves as a lead indicator of how much speculative money is flowing into the overall market. The more optimistic investors feel in general, the more they are willing to speculate in Biotechnology. The more they speculate, the better the outcome. If Big Brother is happy, that happiness becomes contagious. We typically see that spread to the rest of the Modern Family.
Finally, there's the precocious youngest sibling, Sister Semiconductors (SMH). The U.S. Semiconductor industry has been a major innovator among all U.S. industries.
The Semiconductor Industry is the newest industry among the Modern Family. Economists estimate that all productivity growth during the current decade will be IT (Information Technology) based by both using and producing IT industries. The basis of the very growth of humanity is IT. At its core is Semiconductors.
Per 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.
Sister Semiconductors sits at her computer pondering ways to improve all aspects of human life. Her "pet" robot, named Chip, reminds us that automation, artificial intelligence and big data are now a part of our everyday existence.