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.
Last week, we mentioned we were no longer in a split market, but rather in an environment supported by strong internals and an aggressive appetite for risk assets.
This week, we're preaching much of the same.
We continue to see rotation down the market-cap scale, into Micro-Caps and SMIDS, confirming the strong underlying market internals.
Growth and sector leaders, such as Technology $XLK, Communications $XLC, and Consumer Discretionary $XLY are underperforming, but still holding important levels.
Rather than make premature bets on sustained outperformance from sector laggards like Financials, Industrials, and Energy, we want to be patient and see how things play out.
For now, we think this is more of a broadening of the recent rally than any significant sector rotation.
And when we look internationally, the list of global markets making new highs continues to expand, which speaks to strengthening internals among international equity markets as well.
Let's jump straight into it with our US Index table.
Micro-Caps and SMIDS were the week's winners, with Utilities being the biggest loser of the last week and month.
Over a quarter of Utility stocks in the S&P 1500 made new monthly lows during the week. Rotation away from defensive, bond-proxy areas like Utilities as well as Staples and Real Estate, is a bullish development for both stocks and interest rates.
One of this week's themes is bullish rotation down the market-cap scale.
This is best illustrated by the price action of various size-based segment indexes. Let's take a look at each, from Large to Micro-Caps.
Large-Caps $SPY are still battling with their September highs, while the rest have been making higher highs and lows
This bubble chart also shows the rotation into Small-Caps.
Despite their larger Q1 Drawdown, SMIDS and Micro's have significantly outperformed Large-Caps since their September 2nd high.
SMID and Micro-Caps have subtly outperformed Large-Caps since March -- and we've witnessed a notable acceleration in this relative trend in recent months.
As the Russell 2000 vs S&P 500 ratio is extended in the near-term, it would be natural to see this trend cool off a bit. With that said, it has the characteristics of a structural bear-to-bull reversal.
Not only is the ratio extended, it's also hitting a logical level of supply at former lows.
From a long-term view, this ratio making such a sharp move higher is typically consistent with the beginning of outperformance from SMIDS.
We've marked up the chart below with similar momentum surges, looking back 30-years.
Since the 1980s, we've only seen 12 monthly rate of change readings as extreme as the recent one. 10 of these incidences occurred at either the onset or during a period of Small-Cap outperformance.
Looking back through history, when these strong upward thrusts followed considerable declines like the one we just experienced, they've signaled exhaustion and marked key trend reversals. We don't think this time will be any different.
Seeing this rotation down the market cap scale is further evidence of strong risk appetite. We want to lean even more on smaller stocks to express our overall bullish thesis going forward.
Now for our Sector ETF table.
Again, Utilities $XLU were hit hard this week, while Energy $XLE was up over 5%.
The economically sensitive areas were all higher on the week, while the remaining sectors were in the red. Materials $XLB, Financials $XLF, Industrials $XLI, and Energy $XLE are also leading over the trailing month and quarter.
Despite this short-term outperformance, most of these areas are still in severe structural downtrends, especially Financials and Energy.
Here's the market's main long-term laggard. This is Energy relative to the S&P 500.
This is the kind of chart we want nothing to do with on the long side. If this downtrend is ever going to reverse, there'll be plenty of time to react.
Whether Growth and Tech are outperforming their Value and Financials counterparts, comes down to what cap segment you're talking about. We continue to find plenty of opportunities in small and mid-caps of the former group.
In fact, unlike their Large-Cap peers, Small-Cap Tech is outperforming Small-Cap Financials since we began to see an acceleration in rotation down the size scale.
Here's Tech on an absolute basis. XLK is still below its September highs, while the Small, Mid-Cap, and Equal-Weight indexes have all broke to new all-time highs and are trading decisively above their September peak.
While the Large-Cap Tech SPDR ETF may not reflect it, we're still seeing serious strength from smaller tech stocks.
The same could be said for both Communications $XLC and Consumer Discretionary $XLY.
If you're only looking at Large-Caps you're missing the big picture as all the smaller sector indexes are actually making new highs.
We're being especially obnoxious with these multi-pane charts to reflect that the list of new highs in these areas is expanding.
