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 absolute and relative trends at play and preview some of the things we’re watching in order to profit in the weeks and months ahead.
After several months of consolidation, the major indexes have set the foundation for another leg upward in line with their primary trends. We've been seeing many of them resolve higher in recent weeks.
We continue to see rotation into economically sensitive and cyclical assets - supporting our view that there is a strong appetite, not aversion, for risk.
And the FICC markets continue to confirm this bullish environment for stocks and risk assets.
Let's jump right into this week's report with our US index table.
The defensive Dow Jones Utilities Average was the biggest gainer on the week, up over 2%.
Meanwhile, Small, Mid, and Micro-Caps were all lower. Are we finally starting to see some of that corrective action and relative mean-reversion we've been expecting?
We mentioned last week that SMIDs are at a logical area to digest their recent gains, so to see any pullbacks here is not only normal but would be healthy.
And when we switch our attention to Large-Caps, it's looking increasingly like Santa has come to Wall Street right on time again this year. You can read JC's post on the famed 'Santa Claus Rally' if you're not sure what I mean.
In fact, when we look at the performance of the first 5 out of 7 days in this seasonal period, the S&P 500 $SPY is currently up 1.32%.
Historically, when this period is weak it is a harbinger for stocks for the month of January as well as the entire new year.
Here is a good post by our colleague Ryan Detrick of LPL Research in which he goes into further detail on the topic.
Whether you view this adage as purely anecdotal, or whether you think there's something here, it is yet another data point in favor of the bulls.
Now for an updated view of the Dow Jones Industrial Average, which we covered last week.
As you can see, with each new week, buyers are pushing prices further and further above former resistance at their Q1 highs.
We simply can't be bearish equities as long as the Dow and the other Large-Cap indices are above their Q1 highs.
A major theme we've been hitting on lately is the market-cap rotation into SMIDs. This week, however, Mega-Caps finally managed to outperform Micro-Caps for the first time in 2-months.
What's more is that the ratio of the two is at the exact March 2009 high, making for a very logical level to find some support.
Here's a look.
And despite this ratio crashing 15% in less than 2 months - registering its worst-ever 7-week rate of change in the process - its 14-week RSI still hasn't reached oversold conditions. So for now, the bullish momentum regime is still intact.
Momentum can be measured in such a wide variety of ways and analyzing it can require a high degree of subjectivity at times, particularly over longer timeframes. For what it's worth, we're not giving the lack of an oversold reading much weight in this ratio chart.
We're still in the camp that SMIDs are in the process of completing a bear-to-bull reversal, and that the long-term relative outlook favors names down the market-cap scale.
Although, over the short-term, the risk vs reward is with Large and Mega-Caps as we expect them to reassume some of that old leadership of theirs. This ratio is just one of many pieces of evidence suggesting this right now.
And we're not making the bet that we see any significant weakness from Small-Caps, simply that Large-Caps outperform for the next few months. Our near term outlook really just boils down to the fact that while SMIDs are extended, Large-Caps are emerging from multi-month continuation patterns.
Depending on how tactical your approach is, we think shifting some capital back up the cap-scale for now makes a lot of sense. Regardless of what you buy... this strong participation and rotation suggests we want to be buying, not selling stocks in general.
Let's move now to our Sector ETF table.
Utilities $XLU were the big winner of the week. Despite any bid in this group, it's most definitely still a laggard relative to the broader market as it trades at/near record lows vs the S&P.
This weekend we got a fresh batch of monthly candles. We love this part of our process because it forces us to zoom out and focus on what matters most: the primary trend.
So let's do a quick exercise.
Do all of these sectors look like they are in uptrends or downtrends?
The all-time highs really gives it away, huh? Industrials $XLI are at fresh highs too... there just wasn't enough room on the chart.
If all these large-cap sectors are making fresh record highs (and Financials are not far behind) what could possibly lead equity markets lower?
Right now, it definitely isn't going to be any of the above... so that just leaves Real Estate and Utilities. Bears really have their work cut out.
And can you guess the one sector near new lows?
Energy $XLE...
Just look at that long upper shadow on the most recent monthly candle.
We don't discuss candlestick patterns often, but when there is an extreme candle near a major level, we pay attention. In fact, we seek out confluences like these as they really reinforce the importance of various levels of interest.
The fact that buyers couldn't hold the move higher from the GFC lows just shows how little control they have right now.
And the fact that most areas are at all-time highs while Energy is still below its '09 lows - just shows the structural damage that remains...
Now for our Industry ETF table.
