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 absolute and relative trends at play and preview some of the things we’re watching to profit in the weeks and months ahead.
Every major asset class on Earth continues to illustrate risk-taking behavior on the part of market participants.
Yields, Oil, Equities, Base Metals, the Australian Dollar -- there's an overwhelming amount of new highs in offensive areas of the market right now. The weight of the evidence continues to suggest that we want to be buyers, not sellers, of stocks.
The same bullish developments and themes that we've been pounding the table on for months continue to reinforce our stance. Some examples: the rotation into SMIDs, breadth thrusts, the reflation trade, and defensive alternatives making relative lows.
As we said last week, bulls are flush with options to make money in this environment. At the same time, the list of opportunities for bears continues to dwindle by the day.
Let's kick off the report as we always do with our US index table.
While it was a quiet week, the same themes we've been discussing remain intact.
While most indexes on our table ended the week lower, the Dow Transportation Average $DJT was able to book a solid 0.75% gain.
This came off the heels of a great week for the "reopening trade" as traditional transports stocks like Airlines and Truckers caught a nice bid, as well as the COVID-crash culprits such as Hotels, Cruiselines, and Restaurants.
With this as our backdrop, it's no surprise to see DJT closing the week at another all-time high. We continue to like Transports long with a target of 14,500.
Meanwhile, the market continues to throw off additional breadth thrusts.
Just last week, the NYSE + NASDAQ New High indicator registered its highest reading in history. This is further evidence of the broadening participation and healthy internals supporting the rally.
These extreme initiation readings are very common behavior at the beginning phases of bull markets and are among many data points that supplement our bullish macro thesis for risk assets.
Considering such strong internals and broad Equity Market participation, it makes sense to see the Equal-Weight S&P 500 $RSP pushing toward new 52-week highs relative to its Cap-Weight counterpart $SPY.
This is ultimately a function of the "value effect" as value and cyclical stocks, which carry less weight in the Cap-Weighted Indexes, are now outperforming their growth counterparts.
While this development is likely to weigh on the major indexes, it actually speaks to healthy internals beneath the surface.
You can see this trend even more pronounced when you look at the S&P reverse cap-weighted ETF $RVRS on a relative basis.
This price action all jives with rising rates, global growth, and the overall reflationary environment we find ourselves in.
Let's move now to our Sector table.
Value and cyclical sectors continue to lead over the short-term as Financials and Energy booked big gains last week while everything else except for Materials and Industrials was in the red.
The laggards from a sector perspective continue to be the defensive, bond-proxy areas like Real Estate, Utilities, and Staples.
Healthcare $XLV shares certain defensive characteristics and is thus often lumped in with this group of "safe-haven" sectors. Here's a look at the daily chart.
XLV looks vulnerable here in the near term. After recently confirming a bearish momentum divergence from the January peak, Health Care closed out last week with a big down day as it violated its multi-month channel support.
Long story short, this is not a sector we're looking to buy right now.
At the same time, seeing momentum wane and price roll over for Health Care isn't something we want to be ringing alarm bells about. We think this action is mainly attributable to the sectors' defensive posture. In an environment where investors are rushing into risk-assets, we should expect defensive areas to underperform -- and they are... Health Care is just the most recent example of this.
On the other end of the spectrum, cyclicals are absolutely crushing it right now.
Here's a look at Industrials $XLI, which just recently eclipsed their January highs and are now trading at record levels.
XLI is now comfortably above its pre-COVID highs and looks to have made a sustained breakout from its 3-year base.
We want to own XLI above 84.50 with a 1+ year target of 127.50.
Before we move on from Sectors, we'd be remiss not to follow up on Financials $XLF after the week they just enjoyed...
What we said last week sums it up pretty well:
Over the trailing quarter – these serial underperformers are actually the best performers. We can still bet on continued upside from these groups due to the favorable absolute trends at play. More importantly, the risk/reward setups in these ETFs are excellent at current levels with price just breaking to new highs.
Yields and Yield Spreads pushing to new highs, which we'll discuss below, is a major tailwind for this uptrend in Financials.
Read our deep dive on Financials and Broker-Dealers from this weekend for more.
Let's move now to our Industry Group section.
