There's Value Beneath the Surface

From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge 

September saw significant selling pressure in equity markets. The S&P 500 suffered its worst drawdown since last year, and many of the major indexes made a lower low. But when we look under the surface, it really wasn’t that bad. 

We didn’t get an expansion in new lows to confirm the new lows in price. Instead, these readings remained muted across most of the major averages in the US.

Since then, the bulls have regained control. Breadth has improved throughout October as the indexes have rallied back toward their former highs. Although we haven’t seen a real expansion in participation at the index level, things have definitely been moving in the right direction.

Let's talk about it.

Here’s a look down the cap scale at new 52-week highs for all three S&P indexes, from large to small:

Fewer stocks are making new highs today than they were when markets peaked back in September. 

But we are seeing some important developments under the surface, with strong rotation back into value-oriented and cyclical stocks over the trailing one to two months.

Taking a more granular approach, our new highs table clearly shows energy and financials are the strongest areas of the market right now: 

These groups have been putting up impressive breadth readings, particularly when we look at new intermediate-term highs.

We also know these are the market leaders right now because XLF and XLE are the only two sector SPDRs currently trading at new highs (except discretionary).

Another way to visualize the strength from these areas is to look at the percentage of stocks above their 50-day moving averages:

Energy has a whopping 95% of stocks above their 50-day moving average.

Financials are right behind, with 86% of stocks above their 50-day moving average.

For now, we’re seeing some healthy sector rotation into energy and financials, supported by strong internals beneath the surface.

We think value stocks have significant further upside potential. But the bulls need to see an improvement in participation from industrials and materials before a full-fledged relative trend reversal takes place. We like the idea of leaning on financials and energy in the meantime.

As always, we’ll monitor the new data as it comes in each day with a close eye on value sectors in order to gauge the leadership race.

As always, please let us know what you think and/or reach out with any questions!

Premium Members, be sure to check out this week’s Breadth Report below...