From the desk of Steve Strazza @Sstrazza
At the beginning of each week, we publish performance tables for a variety of different asset classes and categories along with commentary on each.
Looking at the past helps put the future into context. In this post, we review the relative strength trends at play and preview some of the things we're watching in order to profit in the weeks and months ahead.
Our last RPP report took a high-level look at the initial damage endured by the recent selloff.
This past week, we saw follow through on that weakness. That means we’ve got to take a deeper look at how the most important assets in the world have held up.
For the first time off the March lows, we’re starting to see a change in character in the way that the market corrects. Particularly Equity Markets, so that will be our focus this week.
Ultimately, while the primary trend remains higher, recent developments have forced a more cautionary short-term outlook. Let's dive into it!
As always, we like to start at the US Index level.
The S&P 500 $SPY remains the 800-pound Gorilla in the room... how it holds up here will be the biggest tell for markets right now.
Click table to enlarge view.
Last week, we said the line in the sand was just under 340 for the S&P 500 $SPY. As with any key level of interest, we don't measure them to the penny - they are usually ranges or zones of interests as opposed to exact prices. The current range encompasses the recent pivot lows and January highs around 333.
As we like to say, we draw support and resistance with crayons, not pencils. So, the 333 - 339 range is what we're watching in the S&P right now.
As price currently trades smack in the middle of it, we're asking ourselves the following question: "Was the recent breakout a failed move, or just a false start?"
If it's the latter, and we break back above 339, we're looking for further upside to 414.
One of the most effective ways to identify potential weakness is by analyzing the action of the laggards. At the Index level, it's been Mid-Caps $MDY. The whole SMID complex continues to lag as Mid's lead to the downside.
In our August 24th edition, we discussed the lackluster performance from this market cap segment. It's only gotten worse since then.
Mid-Caps have been the laggard for a long time now. They printed a failed breakout at their June highs and have been dripping lower since. Here is an updated look at the chart.
This is why we like to watch the underperformers for early indications of tops or coming weakness. On the flip side, we look to the leaders for signs of bottoms or strength, as they provide more useful information in these environments.
As it turns out, Mid-Caps failing at their June highs a few weeks ago were a great leading signal for the weakness we're now seeing in the Small $IWM and Micro-Cap $IWC space, which are both now below those key highs as well. Here's a look.
After breaking their uptrend from the March lows, they've both now violated their June highs.
Are these just whipsaw moves and price soon breaks back above former support? Or, do we see downside follow-through?
We'll know soon, but in the case they do reclaim these levels, we'll be looking to Mid-Caps to make sure they support the price action this time around... unlike a few weeks ago.
Speaking of leaders and laggards, let's switch focus to our Factor ETF table now.
Growth, High-Beta, basically the momentum trade in general, continues to cool off. Here is an updated chart of Large-Cap Growth $IWF.
We're looking at a bearish candlestick pattern at a logical level of support which just sparked the recent correction. What we want to know now is whether that was it in terms of follow-through, or do we have lower to go from here?
The best way to drill into the Growth vs Value trend is by looking at the main areas driving each factor. That would be Tech $XLK and Financials $XLF, respectively.
Here is our Sector ETF table.
First of all, ignore Energy $XLE. Like we discussed last week, we want to be short this sector now that it's below our risk level. It has been such a perennial laggard and has such insignificant impact on the major indexes that we really don't care about it.
As for Technology and Financials, they were both down big last week. Although, when we look at the relative trend it appears we could be approaching a turning point. Here's the ratio chart.
If Financials can outperform Tech for more than a few weeks, we could begin to see trend reversals in areas such as Growth vs Value, Large vs Small, US vs World, etc... but while the seeds have been planted, there is still plenty of work to do.
