Last Week In Review (07-10-2020)

From the desk of Steve Strazza @Sstrazza

For the week ended Friday, July 10, 2020:

Every week we publish performance tables for a variety of different asset classes and categories along with commentary on each.

This week we're going to highlight our US Index and Sector ETF tables, and focus on the laggards as they are giving us the most important information for the current market environment. Let's dive into it.

No surprises here... The Nasdaq $QQQ outperformed aggressively once again last week, booking a +4.7% gain while Mid, Small, and Micro-Caps were all lower. The Nasdaq is the only US Index that is higher over the trailing month.

Here is a chart from our Q3 playbook which illustrates the strength from not only the Nasdaq 100 but also Technology $XLK and Semiconductors $SOXX. It's impossible to be bearish when all these charts are at all-time highs.

But now that the leaders are comfortably back above their former highs, we want to focus on the laggards as we should expect to see some healthy rotation into these areas if the current rally is to sustain itself.

One thing we continue to ask ourselves is, "would we be buying or selling the weakest areas of the market right now?" Here is one of them, the Russell Micro-cap Index ETF $IWC.

Consolidating above the 62% retracement of this year's selloff, this is a chart we'd rather be buying than selling all day.

Now let's look at some of the laggards among the large-cap sector SPDRs.

In our Q3 playbook, we did an exercise where we asked whether we'd be buying or selling each of them. 10 of 11 passed the test. Only Energy $XLE is below our key risk level.

If you read this column each week you have definitely seen our triple-pane laggards chart of Industrials $XLI, Financials $XLF, and Energy. Here's an update of it.

Energy carries little to no weight at about 3% of the Russell 3000. We've had bull markets without it participating in the past, and likely will again in the future. Although, Financials and Industrials are a different story. These are still critically important sectors and we absolutely need to see them hold above our risk levels.

Bears had every chance to punch Financials below the 23 area we've been watching and were unable to get it done. Now it appears as if prices are ready to rebound strongly off this level as XLF closed at the upper bounds of its tight multi-week range today. We think this chart is giving us as important information as any right now.

If Financials rebound and rally back towards their June highs, it's hard to imagine the S&P 500 isn't making new all-time highs in that environment. The bottom line is if Financials are above 23, stocks, in general, are likely to continue trending higher.

Let's look at our Industry ETF table and discuss another reason why strength from these laggards is crucial right now.

Many of the strongest subsectors (most of which are in Technology) are hitting logical levels of resistance at their 161.8% extensions. They can't go straight up forever. Some consolidation here wouldn't just make sense, but would also be quite healthy considering how aggressively they've rallied off the March lows.

Here's Social Media $SOCL which isn't in our table above, but is an excellent example of what I'm talking about.

If Tech and other leadership groups need time to cool off, who's going to pick up the slack? In a perfect world, we'd see some rotation into Financials and Industrials. And based on their charts, we think that's the higher probability outcome right now.