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 outlined how the market is in a very healthy state of order.
Nothing has changed from that message. We continue to see strong demand for risk assets and healthy rotation down the market-cap scale.
Additionally, market internals and breadth continue to improve beneath the surface, supporting the recent leg higher for stocks, both domestically and abroad.
Many Growth-oriented groups that have underperformed recently closed at fresh highs this past week, suggesting these are areas we want to continue to lean on to express our bullish thesis.
Let's jump right into the report starting at the US index table.
Again, we saw Micro-Caps $IWC and Small-Caps $IWM resume their leadership last week. They are now leading significantly over the trailing month and quarter.
While the Nasdaq $QQQ is basically flat, with less than a 3% gain over the past 3 months, Micro-Caps are higher by almost 20%. That's quite the disparity - and one we haven't experienced in at least several years, if not more.
While we've been pounding the table on the new highs in SMIDs and Micro-Caps over previous RPP Reports, we've now seen Large-Cap indices follow-suit.
All of the major Large and Mega-Cap indexes below have reclaimed their September highs.
In our mind, it was only a matter of time before Large-Cap indices broke out. We can now definitively say that we are no longer in a mixed and bifurcated environment, but rather a market that is rewarding buyers and punishing sellers across the board.
In short, the market is firing on all cylinders right now. This continued broadening in participation is about as bullish as it gets for Equity Markets.
Another crucial index we saw break out to new all-time highs last week was the NYSE Composite.
The main difference between the NYSE and other major indexes is that it has a larger weighting in international stocks. Again, this speaks to the fact that we're not just seeing breadth expand in the US, but also around the world.
This is evidence of broad-based demand for stocks as an asset class.
We'll move now to our Sector ETF table.
Nothing has changed from what we laid out last week:
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.
Growth sectors, like Technology, Discretionary, and Communications, continue to look strong and are areas we want to lean on to express our bullish thesis in stocks. This only becomes more true as we move down the cap-scale.
Take a look at the resilience from Equal-Weight Technology $RYT.
New all-time highs on both absolute AND relative terms... I can't think of anything more bullish than that. Based on a number of factors, especially the new highs from large-caps at the index level, we expect Large-Cap Technology $XLK to follow suit in the coming weeks.
So if these Growth-oriented areas are places we want to be betting on, which groups do we want to avoid?
It continues to be Energy $XLE, as well as the bond-proxy sectors like Real Estate $XLRE and Utilities $XLU.
The weakness from these two latter groups speaks to equity market risk appetite and the pricing in of higher interest rates. In fact, not long ago we were pointing out the relative strength in Utilities as a major wrench in our bullish thesis for risk-assets... Fast forward to today, and that's no longer a concern at all.
While Utilities outperformed aggressively from late August to October, we've seen just about all of those gains given back in the time since.
Here's the chart. You can see the recent move better in the insert in the top right.
This is all occurring at a critical level of interest at the ratio's all-time lows from over 20-years ago. What looked like a failed breakdown is now beginning to look like more of a false start. We'll be watching closely to see if Utilities make a fresh record low relative to the S&P in the coming weeks. Everything else we're seeing suggests this is the higher likelihood outcome.
How are some of the other risk-off, interest rate-sensitive sectors doing?
Here's Mid-Cap Real Estate.
Not only is price below some hefty overhead supply on an absolute basis, but it's also breaking to all-time lows relative to the S&P Mid-Cap 400. We want nothing to do with this space.
Financials are also sensitive to the market's expectations for interest rates. The key difference from the bond-proxy sectors is that higher yields are actually a tailwind for the space, as opposed to a headwind.
So, what are we seeing? Across all market-cap segments, the sector continues to plant the seeds for a structural bearish-to-bullish trend reversal relative to the broader market.
While small-caps still have some work to do, the rest have been carving out significant bottoming patterns on a relative basis for the better part of the year. Here's a look.
This indicates growing demand and accumulation for these groups. This kind of development typically doesn't occur in an environment where investors are expecting lower yields and positioning defensively. In fact, it's quite the opposite.
Overall, US Sectors continue to indicate improving risk appetite.
We continue to like Technology, Communications, and Consumer Discretionary, particularly down the market-cap scale... but there are opportunities in many other sectors as well, including Materials, Industrials, and Health Care. We don't need to be too picky - instead, we want to identify and lean on the leaders in all these areas as we always do.
With that said, what's the biggest development in our US Industry Groups table?
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