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 state of the union address, as we break down and reiterate both our tactical and structural outlook on various asset classes. Our ultimate goal is to discuss the most important themes and developments that are currently playing out in markets around the world.
There's been plenty of action these past few weeks. Let's kick things off with stocks and try to make sense of what we're seeing.
Here's our US equities table:
Let's start with a triple pane chart of mid-caps, small-caps, and micro-caps.
The dynamic between stocks along the market-cap scale is an excellent illustration of the mixed evidence we're dealing with these days.
Mid-caps are looking like a valid upside resolution. Although small-caps are printing a nasty failed breakout, and micro-caps just got stuffed at their former highs.
Bulls want to see these small stocks make decisive breakouts and join large-caps at fresh highs. As long as the Russell 2000 is trapped in its former range, this is a big feather in the hat for bears.
It's not just the Russell flaunting a failed breakout right now -- they are everywhere. Here's large-cap Industrials and Materials, which also just undercut their year-to-date highs:
Similar to SMIDs, the picture for cyclical sectors is rather mixed right now. Here's our sector table:
On the one hand, XLI and XLB are trapped beneath significant areas of overhead supply at their summer highs. On the other, financials and energy stocks are back above these key levels and look poised to make new highs.
Here's a look at a custom index of equal-weight financials and energy sector ETFs $RYF and $RYE:
Looks like a pretty standard throwback to former resistance. Whether or not this level will act as support here will be valuable information for cyclical stocks.
The strong correlation with the Equities for Rising Rates ETF $EQRR illustrates the fact that these are two sectors we want to be focused on for long opportunities in an environment where yields are moving higher.
Banks would be one of the most obvious beneficiaries. Here's how they look right now:
Regional banks $KRE are at fresh all-time highs, and the large money-center banks $KBE aren't far behind.
And here's our US Industry table:
Semiconductors $SOXX, banks, and exploration and production stocks $XOP are the leaders over intermediate and long-term timeframes. Home construction $ITB has been a stand-out over the near-term. Here's a daily chart of ITB:
Just like a lot of areas right now, price is currently consolidating at its first-half highs.
Long story short, it's a mixed bag for cyclicals right now. Energy and financials have remained resilient, but it's unlikely this strength will hold up in an environment where industrials and materials aren't participating.
Let's check in on some of the growth areas now. Discretionary $XLY has been on absolute fire:
After such a strong run-up starting in mid-October, price is at a logical level to digest some of these gains. And that's exactly what's taking place, as XLY has stalled out at our objective twice already this month.
As for the relative strength from this group, we're looking at fresh all-time highs following more than 12 months of sideways action:
As long as XLY/SPY holds above those former highs, it looks like a new period of leadership for consumer discretionary is underway.
On the other hand, if this breakout fails and we fall back into the old range, then we're back to where we started and there is no edge in this relative trend.
Technology $XLK has also been strong both on relative and absolute terms. Here's a look at XLK versus SPY:
Similar to discretionary, it recently broke to new highs after a prolonged period of consolidation. As long as this move is intact, we're leaning on this group for long opportunities.
And here's a growth sector that we want to be staying far away from these days. This is large-cap communications $XLC:
Price peaked and rolled over in early September, and just this week XLC hit its lowest level since June. The weakness from this area really shows up in the relative ratio in the lower pane, as communications stocks just made fresh 18-month lows against the broader market. We want nothing to do with these laggards. The same is true for health care.
Just like cyclicals, we're seeing mixed action from growth stocks lately.
With both growth and value coming under pressure in recent weeks, one of the biggest questions we're asking ourselves is which groups are likely to catch a bid and provide market leadership over the intermediate-term. We think discretionary and tech are both good options.
