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.
We've explained how we continue to see the weight of the evidence shifting in favor of the bulls with each passing week.
We can finally say we're no longer in a split market environment. Instead, we see a market supported by strong internals where the bias is clearly higher for equities and risk-assets alike.
After the prior week's resurgence from the Tech/Growth trade, as well as new highs from many of the major sectors and indexes, this week showed a strong rotation back into cyclical groups.
I know we've discussed the potential for some serious sector rotation before. But we haven't seen such a strong week from economically sensitive groups like this just yet.
In last week's column we said:
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.
And that's exactly what happened. This week, we saw some strong follow-through on the recent rally in equities, strong rotation into the lagging sectors, and what some like to call the "reopening trade."
Here's how we got here:
- Last week we discussed strong seasonal tailwinds that could be a potential catalyst for higher prices into year-end.
- This past week, we experienced an onslaught of breadth thrusts in new high indicators at both the sector and index level. We've been pointing out and discussing the bullish implications of these extreme readings since June.
- Last Monday, the S&P registered its highest reading in new 6-month highs in almost 30-years. Read our post about it here.
- Our colleagues Ryan Detrick (LPL Financial) and the guys over at Strategas also pointed out breadth thrusts in new short-term highs for the S&P as well as new 52-week highs for Materials, respectively.
These historic breadth surges continue to suggest broadening participation and improving internals, which are supportive of the new highs we're seeing across the board.
Today's theme is the sector rotation that occurred last week. As Ralph Acampora likes to say, "sector rotation is the lifeblood of bull markets."
Let's kick things off with our US index table.
The Nasdaq was red on the week, while averages with more cyclical exposure such as SMIDs and the Dow Industrial and Transportation Averages, booked strong gains for the second consecutive week.
The Dow Industrials finally made new all-time highs, hopefully ending the conversation of the lack of "Dow Theory" confirmation that's been circulating for the past several years.
What better time to see these averages confirm one another then now, as the broader market is just breaking out of either multi-year or multi-month consolidations. Read more about these Dow averages in JC's post from today.
Today, we're seeing a continuation in this trend from last week as the same indexes are leading, some even up near or over 2%, while the S&P and Nasdaq are lagging.
How about these fresh all-time highs for Small-Caps $IWM.
After multiple years of basing, IWM finally resolved higher last week. As long as we're above 173, the bias is to the upside with a target at 220.
Let's check in on our Sector ETF table now.
As you can see, the rotation out of the secular leaders and into the laggards is not just a one-week phenomenon, it's actually been playing out for the past month or two.
Notice how Discretionary $XLY, Tech $XLK, and Communications have had some of the weakest returns, while cyclicals such as Financials, Energy, and Industrials are the top-performer over the trailing week and month.
This next one was actually our most recent mystery chart.
This is our custom Leaders vs Laggards Index which shows this rotation well, as the laggards are forming a nice bottoming pattern relative to the Tech/Growth sectors that have outperformed for so long.
There is still plenty of work to do in order to carve out a true bearish-to-bullish trend reversal. Although, with a strong momentum divergence and price making a fast move higher after undercutting its recent lows, things are starting to look more promising.
Now here are the custom indexes on their own:
Notice how the leaders continue to make lower highs as momentum is waning, with RSI registering its lowest reading since April. We'll be watching this multi-month consolidation closely to see which way it resolves.
Here are the laggards now:
The laggards, on the other hand, just hit another overbought reading (highest since June) as price resolved higher from a multi-month consolidation.
Although, unlike the leaders, the index is still trapped beneath significant overhead supply and its Q1 highs.
Last week, we noted the new all-time highs in Large-Cap Industrials $XLI. Well, in line with our thesis of broadening participation, this week Equal-Weight Industrials $RGI also made fresh highs. Here's the chart.
Let's check in on our Industry ETF table now.
Banks $KBE, Exploration & Production $XOP, and Aerospace & Defense $ITA all led the way this past week by a mile.
To no surprise, these industry groups are some of the largest within Financials, Energy, and Industrials... so you can see what's helping drive the strength at the sector level.
Money-Center Banks $KBE, Regional Banks $KRE, and get this... even European Financials $EUFN gapped higher and closed above a key level of interest at their June highs and 2018 lows last week. This is a major development for the Financial sector, not just in the US, but maybe even more so abroad.
We'll hit on this more below, but for now, let's take a look at the charts.
We'll be watching these groups for follow-through in the coming weeks/months.
