From the desk of Steve Strazza @Sstrazza and Louis Sykes @Haumicharts
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.
In recent RPP Reports, we discussed how markets had become more of a mixed bag, particularly equities as they try to recover from September's selloff.
We're still waiting for many of the key assets that we mentioned were trading right at or near critical levels in recent weeks to choose a decisive direction.
We have plenty to cover, so let's kick things off with the US Index table.
As you can see, it was a pretty uneventful week. The Nasdaq 100 $QQQ and Utilities $DJU were the only areas to book any meaningful gains.
Coming off last week's stellar performance (+7%), it's no surprise to see Micro-Caps $IWC taking a breather in the near-term as the Russell Micro-Cap Index ended the week down 0.77%. Although, if we zoom out to the trailing three months, Micro-Caps are the top-performing index aside from Transports $DJT.
Seeing relative strength from these two areas is a sign of increasing risk-appetite, so it would be bullish to see this outperformance pick back up over the shorter-term.
The main takeaway is similar to what we said last week... While the major indexes are still giving us some mixed signals, the weight of the evidence remains in favor of the bulls.
This supports our view that we want to be less focused on the indexes and more on individual securities where the risk vs reward, momentum, and relative strength is in our favor.
What better way to illustrate this than with the Wilshire 5000 $DWC - arguably the broadest measure of the entire US stock market.
Evidenced by the flat 200-day moving average, this is still kind of messy despite reclaiming its Q1 highs. It's also important to point out that the Wilshire was unable to break above its all-time highs of 36,650 this week. With waning momentum, could this be a potential double top? In order for that pattern to confirm, we'd have to violate last month's lows, in which case we'd be back below our risk level. Our bias would be neutral at best if this were to occur.
On the other hand, a decisive breakout of this level would be a major feather in the hat for stock market bulls. We'll have to wait and see how things develop in the coming weeks.
Next is the Value Line Arithmetic Index. This index is designed to mimic the change in the Value Line Composite, which is a basket of almost 2,000 stocks across all US exchanges. The Arithmetic version is a reflection of what the Indexes performance would be if each of its components were held in equal amounts.
What really matters is that this is yet another broad stock market index that looks poised to break out of a nice base to new highs.
So, despite our view that the indexes may be in for a period of sideways action in the near-term, most have either already broken out or look well on their way to resolving higher.
It's also important to zoom out on charts like these. When you look back about a decade, you'll notice that these consolidations are breaking higher within the context of very strong structural uptrends... and if there's one thing we know about trends, it's that they tend to persist.
If and when these broad-based indexes finally make a sustained move higher, the impact for stocks around the world cannot be understated.
With that said, let's move on and see what's happening in our US Sector ETF table.
Unlike last week's sea of green, similar to our US Index table, things were much more mixed this week.
Energy and Real Estate, two sectors we wrote about avoiding in a recent RPP Report, booked the largest losses. Nothing has changed in terms of our outlook for these two sectors - while we don't like them at the index level, we can still find opportunities in certain leadership groups such as Solar Energy $TAN or Data-Center REITs $SRVR.
Another topic we've been writing about and discussing internally is the lagging Financial sector - it has remained one of the only risk-on areas that hasn't participated in the rally off March's lows.
Bonds, rates & yield spreads, financials & banks - they're all very correlated. It's all a part of the reflation trade we've talked about so much in recent months.
So, if we finally get some rotation into the sector it's very likely to occur in an environment where yields and yield spreads are rising. That will be a major positive for stock bulls and bond bears.
For this reason, we're looking beneath the surface at different subsectors within Financials to see if the internals are improving or not.
Here is the Capital Markets ETF $KCE.
The Capital Markets ETF $KCE is breaking out of a 33-month base to its highest level in over 12 years. The group also sits at a perfectly logical area to outperform just as it did back in the bull market of 2016/2017.
If we're above 63, we can own KCE with a target at 83 over the next 3-6 months.
New highs from any area of Financials is an incredibly welcomed development. The question that remains is whether this strength is a potential indication for the remainder of the sector. It's something we'll simply have to wait and see on, but with the way things are now there is still plenty of work to do and we're going to need a lot more subsectors start to look like Capital Markets.
On the other side of things, we've noticed Utilities showing strength too.
Across all market capitalizations, Large-Cap Utilities, Mid-Cap Staples, and Equal Weight Utilities are the only sectors currently at overbought conditions.
Utilities are also the top-performer over the trailing month. Additionally, they're seeing the most improvement breadth-wise as they have the highest percentage of new three-month highs of all sectors thus far in October.
Given Utilities' defensive nature, we would like to see this relative strength subdue in the coming weeks. This kind of price behavior and improving participation flies in the face of what we just said about the potential reflation trade. Utilities are typically what gets bought when yields are falling. Financials are on the other side of that coin.
While we mentioned that rates look ready to head higher any day now, data points such as Utilities and Staples dampen the prospects of this being the case... at least for now.
While this is only one data point, it gives us a wealth of information. While we want Utilities to participate on an absolute basis, it is typically not conducive to higher stock prices when they lead on a relative basis. We'll be keeping a very close eye on these bond-proxy sectors in the coming weeks.
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