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 bullish picture still lies as a structural backdrop.
But now, we're seeing mixed signals as many areas have become increasingly vulnerable in recent weeks. This is all taking place as defensive assets have found a footing for the first time in over a year, while risk-on assets approach logical levels of supply.
Recent weakness has been particularly isolated in former leadership groups, like Small-Caps and Growth-heavy areas.
But at the same time, Value and Cyclicals have continued to show resiliency as the Commodity complex suggests risk-taking behavior.
Long story short, things have become more bifurcated than they have done in a while...
Let's jump into our US index table.
Let's start with the good news...
The incredible strength in Industrial-heavy Transports is one of many overwhelming data points that suggests this messy action is nothing but a deserved consolidation within the context of a powerful ongoing uptrend.
The rally in $DJT has been relentless, to say the least. The index has booked a gain every single week since the beginning of February. That makes 14 straight up-weeks! Notice how price blew through our objective at 14,500 like it wasn't even there. That's bullish.
And then we have Small-Caps, still trapped beneath their highs from earlier in the year:
Breadth has been weaker in Small-Caps than it has in their mid and large-cap peers, but nothing too serious to cause concern. We still have not seen any significant flare-up in new lows or any other breadth measure that would indicate it's time to be wary of any divergences just yet.
Unless such deterioration beneath the surface occurs, we view this as nothing but a well-deserved digestion of last year's gains. After all, that is a consolidation pattern following a swift leg up, right? We have no reason to bet against the current trend.
Here's a look at the difference in the percent of new highs between stocks of various cap sizes:
So, do Small-Caps catch up to Large-Caps, or do Large-Caps catch down to Small-Caps? Or do Mid-Caps makes this one a tie and there's nothing to see here?
We're simply waiting for further data to confirm a directional bias. Until then, things are likely going to continue to be messy in the coming weeks.
Let's discuss our Sector table.
The cyclical and commodity-centric Materials $XLB and Energy $XLE stood out last week. Materials are now the second-largest gainer of all the Large-Cap sectors over the previous rolling 52-weeks. Speak about a leadership shift...
With the recent action in the Commodity complex, this is no real surprise and is why we're aggressively buying these areas compared to their Growth counterparts like Technology and Discretionary.
We're anticipating this disparity between Value and Growth to further increase with new lows in the Technology/Financials ratio last week. If this ratio of the two Large-Cap SPDR ETFs decisively loses the 3.60 level, this will be a substantial blow to Growth investors.
But in that same breath, we don't want to see Technology going down on an absolute basis. With many Growth names on the ropes nearing new lows, if we begin seeing deterioration on an absolute basis, risk in general is likely to become elevated.
Shifting our attention to Energy now, we're waiting for a definitive move above XLE's 2016 lows.
Again, given the behavior from Commodities and Energy's Equal-Weight counterpart $RYE, the weight of the evidence suggests another serious leg higher for this space.
Keeping on this cyclical theme, here's the ratio of the Materials sector relative to the broader market.
After flirting with these 2016 lows for many months, the sector has finally absorbed that supply, making new highs. The data suggests this is another leadership group we need to be leaning on to express our structural bullish thesis.
Let's move to our Industry section.
