The RPP Report: Review. Preview. Profit. (09-29-2020)

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.

Like we discussed last week, Equity Markets are becoming more of a mixed bag, but there are still plenty of strong areas we want to be betting on.

We're back above the risk levels we've outlined in recent weeks for most major indexes and we believe the resumption in relative strength from former leadership groups such as the Nasdaq, Tech, and Growth has given us a heads up that the recent correction low is in.

With that as our intermediate-term view on Equities, this post will focus on the strongest areas of the market that we again want to be leaning on for long opportunities to express our bullish thesis in the weeks and months ahead.

Starting at the US Index level as always, and you already know who it is... the Nasdaq 100 remains leadership among the major averages.

In our most recent Happy Hour With Traders video, Todd Sohn of Strategas pointed out the fact that the Nasdaq 100 $QQQ was recently more than 30% above its 200-day moving average. Here's a look.

As Todd explained, we saw a lot of these extreme readings in the 1990s, and "they were all buying opportunities... until the end."

Well, rest assured this was just the first time we've seen a reading above 30% in about two decades so we're viewing this as bullish.

The Nasdaq 100 posted a solid gain last week despite most US Equity indexes booking large losses. When you combine this near-term relative strength with the fact that price held our tactical risk level of 268 and is now just a few points below our prior objective of 280... and we think the Nasdaq is ready to resume its way higher from here.

Check out last week's report for a more detailed look at the price chart as not much has changed since then.

Here is another leader at the index level, albeit over a much shorter timeframe.

After hitting its lowest level relative to the S&P in almost 16-years in May, the Dow Transportation Average $DJT has aggressively outperformed over the past 4-5 months.

Here is the Transports vs S&P 500 $SPY ratio.

A failed breakdown at key prior resistance turned support sparked this fast move higher. We think some mean reversion would be normal after such a strong relative move, but it's not necessary.

We continue to like Transports a lot. Here is the daily price chart.

While the rest of the market has been correcting through price, Transports have corrected through time as DJT has gone more or less sideways for the past month. We think this resilience from Transports as they consolidate around their prior all-time highs is constructive. If and when the overall market resumes its march higher, this is a group we want to continue to look to for long opportunities.

Our risk is also very well-defined at the index level right now. If DJT is above 11,360 we want to be long with a 1-3 month target at 14,375.

As you can see in the table, Small, Mid, and Micro-Caps continue to underperform across all timeframes. We want to stay away from these groups until we see signs of this change.

How about the Sector leaders?

Last week, we pointed out Communications as an area we like, and Health Care as one we want to approach more defensively for now. Health Care was lower by about -2.4% last week while Communications was just about flat.

Similar to the Nasdaq, you already know how we feel about Tech $XLK. They remain leadership and after a few weeks of correcting, we're seeing them reassert their relative strength as they led all sectors by a long shot last week.

The last time we covered Tech was about a month ago when we cautioned that price was approaching potential resistance at our price target near 124. After correcting about 15% lower in the time since, we think a tradeable low has been made, and prices are headed back towards those former highs. We'll reassess things if/when we get there.

Although, there's another sector leader that definitely deserves some attention. Here's Consumer Discretionary $XLY.

Did you know that the Discretionary Sector has not only rallied the most off of its March lows, but more recently, the sector suffered the least severe drawdown among its peers. This is true for Small and Mid-Cap Discretionary as well.

You want to talk about leadership... well, here it is. Check out those new all-time highs relative to the S&P 500.

XLY appears to be resolving higher from a bull flag. If we get follow-through/confirmation in the coming days, we think the next stop is 165.

Let's take a look at what's going on with our Industry ETF table now.