From the desk of Steve Strazza @sstrazza and Louis Sykes @haumicharts
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.
As we discussed in our latest report, bears are running out of any substantial fuel to support their position.
And despite the arrival of some long-awaited selling pressure last week, that absolutely remains the case.
From a more tactical standpoint, though, we’re seeing early signs of some volatility moving into what is a seasonally weak post-election month.
In this post, we’ll play “devil’s advocate” and lay out some of the more bearish developments we could find out there right now. You know… the kinds of things that could start to change our opinion.
But for now, over any meaningful timeframe, we remain buyers, not sellers of stocks…
Meanwhile, improving risk appetite continues to be a big theme.
In a recent post, we illustrated how investors are lurking further and further down the risk spectrum in an attempt to generate alpha. This is definitely something we’d expect during periods of outperformance from risk-on and cyclical assets.
Let’s dive right into this week’s report with a look at the performance of the major US indexes.
Last week, we saw a minor sell-off after a lot of indexes hit key inflection points and Fibonacci extensions, acting as logical areas for some consolidation or corrective action.
Minor corrections are perfectly normal and healthy, and this was exactly that – minor.
Hell, Small-Caps $IWM are up over 30% since November. A pullback here is more than deserved… We don’t want to let selloffs like these divert our attention from the simple yet important fact that we’re very likely in the early stages of a brand new bull market.
But (and this is a big but), if this selling pressure were to ramp up, here’s a short-term chart summarising the levels we’re watching:
The short-term AVWAP from the November 9th gap, a significant supply and demand event, would be a good start. This AVWAP has acted as support ever since and is a big one we’re watching this week. With price sitting just above it, will it be able to act as support yet again?
We’re also eyeing other AVWAP’s from some of 2020’s pivot highs and lows, which are shown and labeled in the chart above.
And from a pure support/resistance perspective, not only do we have the key September highs, but the Q1 and June highs are below us as potential support levels as well.
The reality is that the global stock market as an asset class is only just emerging, for the most part, from a 3-year bear market or consolidation phase. Large and Mega-Caps have been flat for the last four months… This new secular uptrend in stocks is young.
It’s hard not to think there would be overwhelming demand on pullbacks if this bull market really is just leaving the station.
But let’s play some devil’s advocate now. What are some areas that could be vulnerable to volatility in the near term?
Well, we certainly think Small-Caps is a potential candidate. Although, we have for a while… to no avail.
With little to no help from their large-cap peers, SMIDS have made nearly all the gains for the overall market these last few months.
Following a breakaway gap to new all-time highs in November, the Russell 2000 has closed higher in all but one week. This past week marked the second as the index printed an ominous bearish engulfing candle right at our price target of about 220.
We’ve been vocal about shifting capital back up the market-cap scale for the upcoming months and quarters. Given this potential for volatility, in addition to how stretched SMIDs are, we’d say they are definitely the most vulnerable here.
We’re only buyers of IWM if we’re above 220. Below there and our outlook is neutral as we wait to see how price reacts at this key level.
Keeping on this topic, here’s a quick look at the Dow over the last quarter of a century with all the corrections between 5-10% marked in red.
The point here is that minor corrections are perfectly normal. I mean just look at that chart. They happen all the time!
If you want to be in the market, you’d better get used to this kind of price action.
As investors, we should never let these little selloffs distract us from the primary trends at play.
Let’s check in on our Sector ETFs.
It was a tough week across the board for US stocks.
Recent cyclical leaders such as Materials, Industrials and Financials, struggled this week. Here’s a scan we run internally on the Russell 3000.
Materials and Financials saw the highest percentage of new short-term (2-week) lows last week.
This month’s candlestick is also suggesting XLF has more work cut out for it as price just failed at its critical pre-financial crisis highs.
Unless XLF is back above 31.50, we want to stay away from it.
And here’s a look at the Financial Sectors internals.
Despite only a 4.5% correction in the S&P 500, the percentage of Financial stocks in the Russell 3000 that are above their June highs fell a whopping 47%.
Only 1/3rd of Financial stocks are currently above their June pivot high. That’s concerning as such weak breadth is not supportive of further highs.
So while the absolute trends in many of these names are higher, things are still dicey on a relative basis. This only supports what we said about this space in an RPP Report two weeks ago:
Value still has a lot of work to do before we want to bet on a sustained relative reversal… It is far too early to call for a long-term reversal in favor of Value.
Meanwhile, the sector that held up the best this week was Growth-heavy Communications $XLC. The sector had the greatest percentage of new short-term highs as well as the fewest new lows.
And when we drilled into the components driving this strength, it was full of leadership groups like Internet, Entertainment, and Gaming. You know… that whole “Tech, but technically not Tech” theme we’re always yapping about.
Here’s the table:
Despite the increased volatility and uncertainty last week, the sector leaders have become a lot clearer.
It continues to be the Growth-oriented Technology, Discretionary, and Communications sectors… the same leaders from the past several years.
Just look at that bear trap last week as momentum diverged. It’s a pretty sight.
As long as our custom Sector Leaders vs Laggards ratio is above that 2.30 level, don’t expect any meaningful change in the current relative performance among sectors.
Let’s move to the Industry ETFs now.
While some risk-on areas like Semi’s $SOX, Home Builders $ITB, and Banks $KBE ended the week pretty poorly, Software $IGV, Medical Devices $IHI, and Biotech $IBB posted much more modest losses.
If this volatility increases into February, we’ll be on the lookout to identify the groups showing resilience and relative strength.
Because like we identified in Q1 last year, the relative winners in March were the same stocks that led markets higher when buyers eventually took back control.
So while we can’t compare this recent selling to Q1, at the end of the day, seeing these relative leaders continue to step up is a positive signal for these groups and risk assets alike.
Let’s discuss the Factor section now.
High Beta $SPHB got pretty hurt last week, ending down 6.65%, while Low Volatility Factor $SPLV showed strength. This makes sense considering the defensive nature of the week.
But focus your attention on the quarterly and yearly returns of these two, and the real winner becomes apparent. One week doesn’t make a trend.
So as bad as this week was for many of the Factors on our list, the trends in this section still remain more or less unchanged.
For a quick recap, here are the relative downtrends in Low Volatility Factor ETFs. Last week didn’t change the way these structural trends look one bit.
The weakness from this factor continues to support the case for risk appetite.
Let’s discuss some of the global indexes now.
We’ve been vocal on the momentum thrusts we’re seeing left and right in global markets recently.
This is what we said about it two weeks ago:
If you look at previous thrusts like the ones that occurred in 2013, 2016, and 2020… it typically pays to be a buyer of stocks when you get extreme bullish readings like the current one.
Despite this week’s action, nothing’s changed.
While it’s cooled down recently, the percentage of global markets above their 50-day moving average is still firmly in bullish territory.
As long as 40% of global markets stay above their 50-day averages, it’s safe to write this off as just another consolidation.
Considering these major moves since March, some consolidation here wouldn’t be a bad thing. In fact, it gives us a chance to reload and prepare for the next leg higher.
So all-in-all, global markets continue to confirm the “bullish-ness” of this environment.
Let’s discuss the International ETF list now.
Even with all the red over the last week and month, look at the pocket of strength in Frontier Markets $FM and Emerging Markets $EEM. When we’re talking about Frontier Markets, that’s stuff like Africa and the Middle East, Vietnam, Qatar, etc – not exactly areas where money goes to seek shelter…
We saw this exact behavior back in September last year, where Frontier Markets were showing strength relative to the United States, and were actually first to put in new highs on an absolute basis.
Let’s roll back the tape to what we said in September:
FM is the only positive ETF on a weekly and monthly timeframe and is also the leader over the trailing quarter.
That’s some serious relative strength. The major takeaway here is that despite the correction in many major global markets, there is still risk appetite for equities around the world.
Noticing any similarities?
Fast forward to today, and FM is experiencing a shallower drawdown and beating all the ETFs on our list.
We saw this exact behavior last year, and it was a great signal that money was wanting exposure, not shelter, from risk…
And as for the other ETFs on our list, we did a Deep Dive into China a few days ago. You can read it here.
We also discussed the uptrends in play in Israel, which you can check out here.
Let’s move on to Commodities now.
Look at the week Lumber’s just had… up double digits.
It’s hard to put together a bearish thesis when you have a trend like that flying in your face.
And how about this monster gap higher in Silver to kick off the new week. The precious metal was up 10% today.
This comes after the infamous Wall Street Bets group named it their next victim. Whether you’re a believer of that or not, I think the lesson we should all take away from what happened with Gamestop is that we don’t want to take the opposite side of these guys.
More importantly – from a technical standpoint, the way we see it is Silver is on the verge of resolving higher from its 6-month consolidation after a notable breakaway gap.
Even with a resolution higher in Silver, the evidence remains mixed at best for Precious Metals, so we’ll be looking out for more data in the coming weeks to see which way this trend is likely headed next.
Let’s move to the Fixed Income section now.
This asset class is a snooze fest.
Nothing has changed from what we’ve been writing about – higher yields and yield spreads as inflationary pressures continue to be a tailwind for risk assets.
Take a look at TIPs.
Even with all this selling out there, TIPs are still ending the week on a positive and outperforming non-inflation-protected securities.
We’ll be putting out a post in the next few days discussing what our intermarket analysis is suggesting about rates and fixed income more generally, so look out for that!
Let’s move to the last section with Currencies.
The same goes for this section.
The big one here is and continues to be King Dollar. It’s no surprise to see a rise in the Dollar accompanying a sell-off in stocks.
The question we’re asking is what the impact will be if the DXY stabilizes and moves higher from here. Will one of the biggest tailwinds of the last year for risk assets turn into a stubborn wrench for our bullish thesis?
It’s important to keep in mind that these correlations are always changing and to evaluate each chart on its own merit, but we’re monitoring this one very closely to see if there’s any negative spillover into risk assets.
So let’s recap what we’ve outlined today.
It’d be logical to see a minor ramp-up in near-term volatility moving into February, but this does not change our bullish macro thesis.
It’s important to remember that consolidations, especially after rallies like the recent one in SMIDs, are perfectly normal and healthy. But if volatility were to notably increase, Small-Caps look more vulnerable than their Large-Cap counterparts.
Leaders in their respective sectors and industries continue to lead equity markets higher. We continue to see more and more evidence of risk appetite across all asset classes.
And global markets as well as FICC continue to confirm new highs in the US.
The bottom line… we’re still bullish.
Thanks for reading and please let us know if you have any questions.