From the desk of Steve Strazza @sstrazza
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.
The weight of the evidence still suggests it’s prudent to be a buyer, not a seller, of risk assets for more meaningful time horizons.
Shorter-term, the market looks increasingly messy. For the first time in over a year, defensive assets are beginning to stabilize at logical levels of support, while stocks and major risk groups achieve our upside targets. Even a handful of some key Intermarket ratios are potentially diverging from the broader averages.
The macro backdrop definitely leans that this is just a sideways consolidation in an ongoing uptrend.
Let’s not forget that the S&P 500 has just recorded its greatest 52-week gain since the late 1940s, so some digestion is perfectly healthy and deserved!
With our stage set, let’s jump into the report with our US index table.
The most important stock market index in the World, the S&P 500 $SPX, has just achieved our first upward target of 4,100, which represents the 161.8% extension from the COVID-19 crash.
The question we posed in our latest Conference Call was whether these levels are being respected elsewhere in the equity landscape, or whether this was an isolated incident and the S&P 500 resolves higher from this level.
A stronger case can be made for the former rather than the latter.
Defensive assets are finding a foothold, other aggressive areas are also reaching critical inflection points, Intermarket ratios are potentially diverging, and stocks down the cap-scale are putting in lower highs:
To be clear, this does not mean we’re betting equities are going to fall back into another bear market. The evidence is still suggesting the complete opposite. In fact, we’re still very much in the camp that this is the early innings of a new bull cycle.
Zooming out, Small-Caps are very much consolidating in a constructive and healthy manner at a logical level. This is perfectly healthy behavior.
And while some data points have been taken away from the bulls, at least in the near term, let’s not forget that there have still been great pockets in strength in economically sensitive areas. The DJ Transportation Average $DJT, for instance, is now up for 12 consecutive weeks!
This is a great leadership area we’re still very much leaning on longer-term.
Let’s move now to our Sector section.
Look at the week Healthcare $XLV and Real Estate $XLRE just had.
This is one of many examples of some more defensive areas catching a recent bid.
But at what point does this become an issue?
Let’s run through a few…
If Equal-Weight Consumer Staples managed to close back above its 2011 lows relative to the Equal-Weight S&P 500, this would definitely be a major wrench in our bullish thesis. There’s still some space to go before that could happen, and the evidence still suggests this is a historic top in this ratio.
How about Utilities?
When we zoom out, it puts this recent strength in perspective. While Utilities are not helping the bull case in the near term, there’s still a lot more room to go before causing any structural damage to risk.
Healthcare stocks are no doubt piercing new absolute highs, but they have still work to do in relative terms. For broad exposure to Healthcare, we’re owners of the SPDR Large-Cap Healthcare ETF $XLV above 125, with a 3-6 month target of 156.
Last of the defensives is Real Estate.
In fact, XLRE just eclipsed its pre-COVID highs this week and has been digging in relative to the broader market. Again, for broad exposure to Real Estate, we’re owners of XLRE above 42, with a 6-12 month of 52.50.
The takeaway here is that while these defensive sectors have shown traction relative to the broader market in recent weeks, the data suggests these are not a future leadership groups based on where the macro picture lies.
If stress becomes more elevated, we’re likely to see it show up here first.