From the desk of Steve Strazza @Sstrazza
Looking at the past helps put the future into context. In this post, we review the relative strength trends at play and preview some of the things we’re watching in order to profit in the current market environment.
Last week, we highlighted a number of critical Stock Market Indexes and Sectors, as well as assets in the FICC Markets that were approaching logical levels of overhead supply.
This week, we’re going to follow up on this theme and see how some of these charts have reacted to the critical levels we pointed out last week.
Based on what we were seeing earlier this month, we thought a pause was warranted for a variety of assets. We got this in some areas, while others blew straight through their resistance levels and posted nice gains in the time since. Hence the moniker, “It’s a market of stocks, not a stock market.”
In this post, we’ll separate the weak areas that continue to struggle at key levels from the strong areas which continue to grind higher and press through any overhead supply thrown in their way.
Let’s start at the US Index level.
After seven months of going absolutely nowhere, did you know the S&P 500 $SPY finally broke out to new all-time highs last week!?
This is one of the areas we identified as facing potential resistance recently… keyword: “potential.” After a little consolidation, the major average blew right through its former highs. Here’s the chart.
Momentum is fully supportive of these new highs as the daily RSI-14 just printed its highest reading since January of 2018.
As long as we’re above 339, we’re targeting the 161.8% Fibonacci extension just beneath 415 as the next stop for the S&P. That’s more than 20% of additional upside from current prices. Not too shabby.
As for the Small $IWM, Mid $MDY, and Micro-Caps $IWC which we covered last week, not much has changed. These indexes all underperformed for the second straight week, but IWM and IWC remain above their June highs, while MDY is still trapped beneath this key pivot high. Check out last week’s post for these three charts.
As for the Dow Averages, Transports continue their epic rise. Here’s a chart showing both the “Old Dow Theory” and “New Dow Theory” averages.
With both Transports $DJT and Semiconductors $SOX now making new highs, is it finally time for Dow Industrials to pick up their game and reclaim their record highs from Q1? That’s definitely the bet we’re making right now.
Now for our Industry ETF table. We saw broad-based strength from everything outside of Homebuilders $ITB this week. Along with the Banks $KBE, these two areas are still trapped beneath the resistance levels we outlined last week.
How about the resurgence from the secular leaders in Tech lately? Semis $SOXX, Software $IGV, and Internet $FDN all posted gains in excess of 3% last week as many leading Tech Industry Groups blew right through key resistance to fresh all-time highs.
Here’s a look at some of them. Note that while Cloud Computing $SKYY is not included in the table above, it is shown in the chart as it’s apart of our broader universe of Industry ETFs we track.
This chart pretty much speaks for itself. After about two months of consolidation above former resistance, these groups all broke out to fresh all-time highs last week.
Considering the action from Tech, it looks like there’s a better chance of broadening participation as opposed to clear sector rotation. We’re just not seeing any evidence that money is rotating out of Tech right now. In fact, it appears to be quite the opposite.
Here’s our Sector ETF list.
No real shocker here. Communications $XLC and Technology $XLK – the sectors that are home to the Industry ETFs discussed above, were this week’s biggest gainers
Keep in mind that when Communications was added as a sector it adopted many of the Internet stocks that used to fall under Technology. As such, we now treat the two sectors together as “Tech” along with a myriad of Industry Groups from other sectors. Tech is in every sector these days, you just have to dig in and find it.
Last week, we pointed out the Nasdaq running into potential overhead supply at our price objective. In hindsight, it turns out there wasn’t much supply there at all as price cut through it like a hot knife through butter.
This week, we have Technology running into a similar level of possible resistance at its 161.8% extension of this year’s drawdown. Will it blast right through it like the Nasdaq?
We’ll know soon. Here’s the chart.
The sector has been incredibly strong off the March lows, with momentum confirming the new highs. Contrast today’s RSI-14 with how it looked back in January and February. This is a perfect example of the difference between confirmation and divergences.
Additionally, XLK has failed to register a momentum reading below 50 since early April. This is a classic characteristic of some of the strongest uptrends.
What’s new in Factor land?
Absolutely nothing outside of Large-Cap Growth $IWF and High Quality $SPHQ. We outlined a trade setup in SPHQ last week which you can read about here.
As for the relative trend in Growth vs Value $IWD, it’s looking more and more like a sustained breakout and less like a potential failed move with each passing day. It really all boils down to the relative strength from Tech and weakness from Financials $XLF. Until that changes, this ratio is going to continue grinding higher.
Here’s an updated look.
After 20-years of no progress, we’d expect this to have some legs following such a massive base breakout.
Now let’s check in on what’s going on around the world.
This table is a sea of green right now. As I discussed in a post last week, breadth is definitely expanding among International Equities and we’re bullish. We put out a handful of trade ideas in individual country ETFs in Europe and the Asian-Pacific as ways to express our thesis.
Click here for the full post, complete with global breadth statistics and trade ideas.
With that said, the US is still the best house on the block. Here is the S&P relative to the All-Country World Ex-US ETF $VEU.
After working off its bearish momentum divergence, this ratio looks poised to make new record highs… again.
Another thing to note is that Frontier Markets $FM (covered in last week’s post), the garbage of global equities, are steadily improving and working through a swath of overhead supply, rather than rolling over at this confluence of resistance. Price is now comfortably above the cluster of 2015-16 lows and filling its breakaway gap from March 9th.
When even the worst stocks won’t go down, it can only be viewed as bullish. That’s exactly what’s going on here.
There’s really nothing new to report on from a Global Index perspective.
While the US maintains its leadership, Europe and parts of Asia continue to show improvement. This is something we’re monitoring closely right now as we’d like to see more world equity markets achieve new highs on a local currency basis.
Speaking of currency, the weak dollar has been a tailwind for International Equity ETFs – hence why so many look a lot better than their respective home-country indexes.
If you want evidence, just look at the negative returns over every timeframe for the US Dollar Index $DXY.
One chart that’s been trading just above key resistance lately but we didn’t mention last week is the classic risk-on barometer, the Aussie/US Dollar cross.
We’ve been eyeing that crucial 0.70 level for several years now as price has continued to test it from both above and below. Well, it looks like bulls have taken control for now as prices have ripped higher recently. You can mark this one down as another feather in the reflation trade hat.
How about Commodities? With the Aussie Dollar looking this good, we’d expect the more cyclical assets in this space to be performing well.
And that’s exactly what we’re seeing. Lumber continues to be an absolute freight train, trading at some of its most extreme overbought readings on record. Over the trailing month, Natural Gas has joined the party as well.
There are two major developments we’re waiting on in this space right now.
One is for Copper to either make a sustained breakout or fail at its former highs around $3.
Two is for Crude Oil to finally pick a direction and resolve from the tight range it’s been trading in for almost three months now. The level in Crude Oil is $43.
These moves could happen any day now and we’ll be sure to follow up when they do. Read more about the important levels in these two commodities in Bruni’s recent post.
Last but not least, here is our Fixed Income table.
With rates moving higher lately and risk-assets breaking out across the board, all the noise about deflation or disinflation has really died down.
Treasuries have taken a hit, as have most areas of the Bond Market.
One area that hasn’t really been affected is Treasury Inflation-Protected Securities $TIP. Here’s a wild guess why… because they hedge out the cost of inflation, which investors are clearly bracing for.
These new highs for TIPs fit in beautifully with the reflation trade thesis.
The main takeaway from my review this week is more of a question than an answer: Do we need to see actual rotation – as in money flowing out of one area and into another?
In other words, does rotation have to be a zero-sum game?
Or, can money flow into one area without flowing out of another? Then it wouldn’t so much be rotation, but instead a broadening of participation.
Considering financial markets just experienced their largest liquidity injection in economic history and lots of cash remains on the sidelines, I’d argue there is a high likelihood of the latter scenario playing out.
There’s your Review, Preview, and Profit Report for the week.
Thanks for reading and please let us know if you have any questions.