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.
The market continues to fire on all cylinders right now. Last week's gains were nothing but a continuation of the same resiliency and momentum we've come to expect from risk assets over the last year.
As for what's providing buying opportunities over the next few months and quarters, it is still strongly centered around cyclical areas pertaining to Energy, Financials, International Markets such as Canada, and Commodities, among many other areas we've been hitting on.
Last week's price action continues to strengthen our view that we've reallocated into all the right areas. As such, our best course of action is to continue looking for the best risk vs reward opportunities in these leading groups.
With that said, let's jump right into the US index table.
The big level we had our eyes on last week was the September highs in the Nasdaq $QQQ.
Here's what we said about it:
This is as logical a level as any for the Nasdaq – and Growth in general, to catch a bid. We think the entire space is likely to rebound here. Not just on an absolute basis, but also on relative terms.
The idea here is that while growth and the Nasdaq can lag on a relative basis, bulls really don't want to see them roll over on an absolute basis. The moment that starts happening, money is likely flowing out of stocks as an entire asset class - even the leading value sectors, and into protection like Bonds and Gold.
But we're not seeing this happen at all, and have no reason to make the bet that this will be the case any time soon as defensive assets continue to make new relative lows.
Meanwhile, buyers came in to staunchly defend a lot of key levels in growth areas last week which speaks to the continued control of bulls and their strong appetite for risk.
It's not that money is flowing out of stocks... Instead, it's simply rotating between stocks. This is constructive as rotation is the "lifeblood" of a healthy bull market.
We're not just seeing sector rotation but have also witnessed very strong market-cap rotation since last year. And we're still seeing it... Micro-Caps $IWC were up double digits last week!
It was IWC's best week since April of last year and the 6th best week since we have data going back to 2005.
This is really nothing new and is a theme we've been leaning on for some time... Ever since the rotation down the cap-scale turned up the heat in September of last year.
After briefly undercutting the first major Fibonacci extension from the 2018-2020 bear market, IWC just reclaimed this key level with a monstrous candle. We refer to this as a marubozu, which is about as bullish of a candlestick as they come.
Just take a step back and realize what this is telling us: arguably the worst, smallest, and most neglected names for the last decade are leading the United States higher...
As long as IWC remains above 144, we're owners, with a 3-6 month target of 198.
What's more, is that these moves in the SMID-cap space are all being confirmed by strong internals and breadth thrusts under the surface.
Speaking of strong breadth, in the case of the NYSE New Highs list, it's at its highest level since 2004...
We've mentioned these historic breadth thrusts time and time again, and if they all have one thing in common with one another, it's that they're early cycle characteristics.
Considering the slew of these historic readings that have continued to pour in since last summer, we think it's quite unlikely this time will be any different from past periods that experienced similar thrusts. In other words, based on the current evidence we want to be positioned for higher stock prices for the next few years to come.
We'll be the first to tell you when we see signs of this start to change, but there's nothing yet.
Next up we'll discuss our Sector table.
Green all across the board here, too.
Not only are we seeing these moves higher on an absolute basis, but we're getting major ticks of approval from our relative and cross-asset ratios.
In this case, the ratio of Small-Cap Consumer Discretionary $PSCD relative to Small-Cap Staples $PSCC just went out at a new all-time high.
These same attitudes of risk-taking behavior are definitely intact in the Small-Cap space, which is something we love to see supporting our bullish macro thesis.
If you've been reading our research, we've been pounding the table on cyclicals (you can read about it here, here, here, here, and... here). We've been a bit obnoxious... we know. But that's because this is a critically important theme and we want our clients to be ahead of it as much as possible.
Despite how extended a lot of these gains appear in the short-term, when we consider our time horizon of looking out months and quarters, it reveals what we're really working with here...
With a fresh breakout in Energy on an equally weighted basis, there seems like there's plenty of new ground to make up for, right?
Long story short, we believe many of these relative trends are just getting started.
Let's discuss our Industry table now.
