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.
Despite being in a split market environment, we've pointed out how the weight of the evidence continues to shift further and further in the direction of the bulls with each passing week.
This past week, we finally saw what appears to be the tipping point as stocks and risk-assets were all up generously. We've been waiting for the market to make up its mind from a risk-appetite perspective, as well as for the stock market to pick a direction after almost three months of sideways action.
Not only was the S&P up over 7% last week, but it's following through with a monster move today. The S&P is up about 3.5% as I write this.
But there's even more good news for investors... it looks as though the election went a bit smoother than many imagined and granted the market with the certainty that it needed. Maybe even some gridlock which is typically good for markets.
And did I mention the serious seasonal tailwinds that accompany this time of year? Not only are we entering the best couple months of the year, but we also have election year tailwinds.
Ryan Detrick of LPL Financial always puts out some great statistics on seasonal trends - and no matter how you cut it, November is the best month during election years, followed closely by December.
We're going to keep it short and simple this week because there really isn't much to say except risk-assets are moving higher and our outlook has become increasingly bullish. We have witnessed a ton of volatility in recent sessions, and it's all been to the upside.
Let's jump right into it with our US index table.
Everything was up, led by the Nasdaq which just keeps rocking, up another 9% on the week.
Let's just take a step back, zoom out, and revel at the incredible outperformance from the Nasdaq over the trailing year. It is up a whopping 46%. Contrast this performance with other large-cap indexes like the S&P 500 and Dow, which are up 13% and 2%, respectively.
This is why we've been leaning so heavily on the strongest Tech/Growth stocks - many of which are Nasdaq constituents, as a way to express our bullish thesis on equities for several years now.
Two takeaways from this...
- Trends tend to persist and leaders typically continue to lead.
- Know what you own. It can make all the difference.
With that said, we know this kind of extreme outperformance can't last forever... and it's persisted for at least 15-years now.
While the major indexes across all market cap segments posted impressive gains today, the Nasdaq 100 $QQQ actually fell by more than 2% and printed an ugly bearish engulfing candle, erasing all its gains from the past two sessions. Check it out.
While this does look a bit concerning, we'll need to see some downside follow-through in the coming days in order for this bearish pattern to confirm. We'll be watching this one like a hawk tomorrow.
Now, here is a look at a ratio chart of the Nasdaq 100 vs the Wilshire 5000 $DWC, which is one of the broadest measures of the total US stock market.
Looking back two decades, notice how this ratio peaked in March of 2000, just as the Dot-Com Bubble popped and the market subsequently crashed. We do not think anything like that scenario is about to happen today, but we do believe this is as logical a place as any to see this relative trend reverse.
Not only is price stalling right at its former all-time highs, but it also recently registered its highest overbought reading since the 2000 peak along with a potential bearish momentum divergence. The setup is eerily similar to what occured two decades ago.
Are we finally going to see this long-standing outperformance from the Nasdaq come to an end? We'll just have to wait and see. But it's something we need to be aware of.
Meanwhile, here is a chart of the Dow Industrial Average $DJI, which finally eclipsed its Q1 highs today with a gain of roughly 3%... something the other large-cap indexes accomplished months ago.
Despite the breakaway gap to fresh highs, the Dow gave back much of its gains intraday and failed to close at a new all-time high. We'll be watching closely to see how price reacts at this level in the coming days/weeks.
Although, based on the weight of the evidence from the other major indexes, it was only a matter of time until we saw the Dow achieve new highs like its peers.
In contrast, here are some line charts of the S&P $SPY and Nasdaq $QQQ.
Notice how these charts look much different from the Dow, as both are comfortably above their year-to-date highs.
Next, let's check in on our Sector SPDR table.
Do I even need to say it anymore? Tech $XLK led with an almost 10% gain this past week, while Energy $XLE was the laggard with a less than 1% gain. But today, Technology $XLK closed on its lows with a bearish engulfing candle similar to the Nasdaq.
Materials $XLB, Communications $XLC, Industrials $XLI, and Health Care $XLV also booked some hefty gains in excess of 7% last week.
Here is a look at the Communications sector, which could be coming under some pressure as it contains many of the "stay-at-home" stocks that have been leading for so long.
Again, we have another bearish engulfing candle from one of the secular leaders today.
Most of these leaders were sharply lower while the beaten-down "reopening" stocks, such as Airlines, Casinos, Hotels, and more drove much of the gains on news of a potential vaccine from Pfizer $PFE.
We'll want to watch these relative trends closely as we could be in the early stages of some serious sector rotation.
Not only did the Dow Industrials make new highs today, but the Industrial Sector SPDR $XLI also rocketed higher by about 5% and made fresh all-time highs on an intraday basis.
Industrials are arguably the most important sector due to their strong historic correlation with the broader market. They are also home to many economically-sensitive stocks, which were much higher today as we saw a serious bid into the "reopening" trade.
So, what's going on in Factor land these days? Let's take a look.
There have been little-to-no developments in this space for months now, with the theme of Growth $IWF over Value $IWD remaining very much in place while High Quality $SPHQ and High Beta $SPHB have been working their way higher across all timeframes.
Although, as evidenced by the trailing 12-month returns, Growth (+38%) has really been the only game in town for quite some time.
Today, the main growth sectors - Technology, Communications, and Discretionary - were all lower. Meanwhile, the most cyclical and value-based sectors such as Financials, Energy, Materials, and Industrials booked some serious gains. While one day definitely doesn't make a trend, the extreme bifurcated performance between these groups today is something that demands our attention.
With secular laggards like Energy and Financials up 14% and 8%, respectively on the day - this certainly has the feeling of an initiation thrust that could spark a larger rotation between the growth and value sectors.
This ratio chart of Growth vs Value looks a lot like the Nasdaq vs Wilshire ratio, with a bearish momentum divergence occurring just above those key former highs from 2000. This has the potential for an epic failed breakout. We'll be watching closely.
