From the desk of Steve Strazza @sstrazza
Welcome to our latest RPP Report, where we publish return tables for various 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.
We consider this our weekly state of the union address as we break down and reiterate both our tactical and structural outlook on various asset classes and discuss the most important themes and developments currently playing out in markets all around the world.
In our last report, we pounded the table on our position that markets are a total mess these days. Another theme we hit on was how many significant risk assets were trading at or below critical levels of overhead supply.
In the time since, we saw bears try to take control of things once again, and as of Friday's close, it looked like they were finally doing so. But that changed fast as a lot of last week's "breakdowns" have failed and reversed higher this week. That's what we're going to focus on in today's report.
What is one of the most common characteristics of a choppy market? "Whipsaws" definitely have to be up there. And we're seeing dozens of them confirm this week after shaking beneath key support last week. If you google the term, you'll find this on Investopedia:
"Whipsaw describes the movement of a security when, at a particular time, the security's price is moving in one direction but then quickly pivots to move in the opposite direction. Whipsaw patterns most notably occur in a volatile market in which price fluctuations are unpredictable."
I think that sums it up pretty well. We're also seeing many critical risk assets simply dig in and find support at key levels. Either way, the bulls appear to be making "a kick save and a beauty" in recent sessions.
As for the existing leadership areas like tech and growth, they're still holding up just fine as they continue to make new record highs along with the large-cap averages.
Let's start things there, and then we'll dive into all the failed moves we're seeing.
Not only is the Large-Cap Tech SPDR $XLK at new all-time highs on an absolute basis, but it has also been the top-performing sector over the trailing quarter. But, how about relative to the broader market?
Despite going nowhere on a relative basis for the past year, Tech continues to show relative strength over the short term. Is the sector ready to resolve higher vs. the S&P and reassert that old outperformance? Or are we looking at another failed move in the making? We should know soon...
Health Care has also been a top-performer over the near term. Here are two of the largest pharma companies in the world - Pfizer $PFE and Merck $MRK, which together comprise about 10% of the Health Care SPDR $XLV:
If Merck can resolve higher from this 20-year base like Pfizer appears to be doing now, it's hard to believe the sector is under any real pressure. In fact, seeing these massive base breakouts materialize would suggest a strong leg higher for these stocks and likely occur in an environment where the entire space is trending higher as well.
Now for the laggards. Yes, Energy stocks - we're talking about you... Again! Here's the Energy Sector SPDR $XLE:
Take a good look at this chart because we see similar patterns play out across commodity markets in addition to commodity-centric currencies and stocks. Exxon Mobil put in a similar bear trap around its April lows, as did many subsectors such as Exploration & Production $XOP and Oil Services $XES.
Speaking of industry groups, let's look at them next:
XOP has been the biggest laggard over the very near term, so it will be interesting to see how much of a move we get off this failed breakdown. Here's a zoomed-out look of it digging in at a very logical support level along with Energy:
As of Tuesday's close, the ETF has already recovered its entire loss from last week. It will be interesting to see how these stocks finish the week.
With Precious Metals and Gold Miners back at the bottom of their ranges, we decided to take a shot on the long side via options considering the well-defined risk/reward.
We see a lot of strength from the "reopening" - or what we like to call "back to normal" stocks this week as well. While this next ETF isn't exactly an industry group, it's a great barometer for this theme as it holds all of the modern travel stocks like Airbnb, Uber, and Expedia, among others. This is $AWAY:
Notice how price shook beneath its pivot lows from the summer just to rebound right off of support around 24.50. This level also coincides with the ETF's inception date highs from just before the COVID selloff last year.
Is it any coincidence that they launched a Travel ETF about a week before the world went into lockdown, and no one could travel? Eerily similar to the Homebuilders being launched back in 2006, just before the subprime crisis hit. I don't know how these ETF providers pick their spots so well, but I appreciate them for the data.
Long story short, these stocks are the laggards, and even they aren't breaking down. It's the same story for the Airline ETF $JETS. This resilience from even the weakest groups can only be seen as bullish.
Next, we have Factors.
High Beta $SPHB continues to get whacked while Low Volatility $SPLV stocks have caught a bid over the past few months.
This next chart is more of a niche ETF than an actual factor, but we're just looking for uptrends at the end of the day, and this chart is definitely that. Here's the Invesco Buyback Achievers ETF $PKW:
If we're above 90.50, the bias is higher, and we want to be long with a 2-4 month target of 122.
Let's round out our discussion on US Equities with our Index table now:
Notice how poorly SMIDs have performed over the trailing month and quarter relative to their large-cap peers. Again, we're talking about laggards here. This is the SPDR Mid-Cap 400 ETF $MDY:
This index went sideways for 5-months last year while mid-caps lagged relative to the S&P. Fast forward to this year, and we can say that mid-caps have gone sideways for 4 or 5 months again while the index underperforms the S&P.
Is this failed move off of support ~0.11 the spark this group needs to kick off a relative trend reversal in favor of mids?
We can only wait and see, but if we do start to see sustained outperformance, we'd imagine it's happening in an environment where the index finally breaks out of its recent trading range and achieves new all-time highs. After all, MDY sure looks poised to test those highs around 500 for the sixth time in just four months as price is sitting just about 1% away.
Let's move outside of the US and see what's going on around the globe now:
