April Strategy Session: 3 Key Takeaways

April 6, 2023

From the desk of Steve Strazza @Sstrazza

We held our April Monthly Strategy Session on Monday night. Premium Members can access and rewatch it here.

Non-members can get a quick recap of the call simply by reading this post each month.

By focusing on long-term, monthly charts, the idea is to take a step back and put things into the context of their structural trends. This is easily one of our most valuable exercises as it forces us to put aside the day-to-day noise and simply examine markets from a “big-picture” point of view.

With that as our backdrop, let’s dive right in and discuss three of the most important charts and/or themes from this month’s call.

1. Sector Rotation

Sector rotation is the lifeblood of a bull market, and it's beginning to pump through growth sectors.

The bubble chart below shows the 2022 performance on the Y axis and the quarter-to-date return on the X axis for all the large-cap sector SPDR ETFs:

As you can see, Technology $XLK, Communications $XLC, and Discretionary $XLY have booked a solid gain during the past quarter, which isn't something we've been able to say for a long time. However, when we look at the returns of the value-oriented and defensive sectors, they have performed slightly lower to unchanged during this time.

This tells us that the stocks that were laggards last year are now the leaders in 2023, and we want to invest in those areas in the foreseeable future.

2. Tech Stocks Cut a Path for the S&P 500

Not only are technology stocks back in the driver's seat as they continue to lead the way higher, but they are the largest sector within the S&P 500, representing 26% of the index.

The chart below shows the Technology Sector reaching its highest level in seven months, overlaid with the S&P 500 contending with overhead supply.

It's no surprise these two charts look incredibly similar due to the S&P 500 composition. So will the S&P 500 follow the XLK higher, violating a downtrend line and completing a multi-month reversal?

Time will tell, but in the meantime, we don’t want to make the bet these two charts resolve in opposite directions. As long as XLK cuts a path higher, the weight of the evidence – or index – suggests that the S&P 500 will follow.

3. Strength Runs Deep for the Dow

You can’t have a bull market without bulls, or new highs, for that matter. That’s why we look beneath the surface for signs of market health.

The advance-decline line is a classic breadth indicator, measuring the number of advancing issues against the number of stocks that declined on the day.

Check out the Dow Jones Industrial Average's advance-decline making new record highs:

This is a significant improvement in internals and speaks to the strength and broadening participation at the individual stock level for the Dow components.

It’s basic math. More stocks are going up, not down.

This kind of internal strength is a bullish development and bodes well for the index, suggesting new highs at the index could follow.

Those are some of the main takeaways from this month’s strategy session.

Thanks for reading, and please let us know if you have any questions!

Allstarcharts Team