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.
In recent weeks, we've seen some rotation back into Large and Mega-Caps, which has propelled the major indices to new highs, while SMIDs are still resiliently consolidating. While the list of negative data points has grown, it's still not close to anything that warrants concern.
Developed Markets, particularly European equities, are resolving higher across the board -- a move confirmed by strong breadth and bullish internals. In short, we continue to see strong equity market participation around the Globe.
We're also seeing signs of another leg higher for the Commodity complex as more positive economic data pours in.
Ultimately, risk markets remain in a healthy state right now.
Let's jump right into the report with our US index table.
There is really nothing new happening here as the big-cap domestic indexes continue chugging along at or near new highs.
The Nasdaq 100, along with SMIDs and Micro-Caps have been consolidating in the very near term. In fact, these averages - which have led the market higher off of last year's lows (as evidenced by the 12-month return data) have become the laggards over the past few months (evidenced in shorter-term return data)
At least for now, the opportunity cost looks to be in these smaller names.
Let's take a look at how the median stock is doing. Here is the Value Line Geometric Index $VLG which just made yet another all-time high this week.
This 23-year base breakout is undeniable, and it's about as bullish of a backdrop as you can get for equity markets.
While we've seen some rotation back into Mega-Cap names, this comes as the Equal-Weight S&P 500 $RSP is retesting an important zone relative to its Cap-Weight counterpart. Seeing this base breakout hold speaks to the healthy internals that continue to support the rally in US equities.
This trend is also in sync with other themes, particularly the relative strength from Financials, Value, and Cyclicals, as the Equal-Weight S&P has greater exposure to these areas versus the Cap-Weight index, which is dominated by Mega-Cap Growth.
As long as we're above those former highs at 0.0350 the evidence points to this being a real breakout. Again, this is constructive as it speaks to the increasing amount of names participating beneath the surface.
Let's move now to our US Sector section.
It's reassuring to see Growth-oriented sectors back at new highs. This comes as the 21-day correlation between Financials $XLF and Technology $XLK (the two sectors that are the most represented in Value and Growth, respectively) recorded its second-lowest reading since the late '90s.
Now, we're seeing both these areas working higher on an absolute basis. But... we're also seeing near-term relative strength from safe-have and classic defensive sectors such as Utilities, Staples, and Real Estate.
While we're still in the camp that we want to be overweight Financials and cyclicals over Technology, and seeing all these areas work at the same time is a positive development... we do need to keep a very close eye on these defensive groups as any sustained outperformance here will be a major red flag.
Are Staples carving out their 2nd series of higher highs and higher lows relative to the broader market? We'll see...
Another chart that is just jam-packed with information right now is Industrials $XLI. This sector is not only arguably the most diversified of all its peers, but it also has the strongest historical correlation with the overall market. Seeing as the ETF just achieved our primary target, things can't be too bad.
Although, where we go from here and how price reacts at this critical level is where we are focusing our attention right now.
Not only does this 100 level represent the 161.8% extension and our primary objective from the recent multi-year base breakout, but it is also a key psychological level for investors. For these reasons, the current level represents a logical place for sellers to show up and cause XLI to correct or digest its recent gains.
The weight of the evidence still suggests Industrials carry on with their uptrend. But unless we're above 100 in XLI, the near-term risk is elevated and we don't want to own it.
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