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 relative strength trends at play and preview some of the things we’re watching in order to profit in the weeks and months ahead.
Like we discussed last week, Equity Markets are becoming more of a mixed bag. This week, we'll expand on this theme.
Prices continue to flirt with the risk levels we've outlined for various assets in recent weeks. We still believe the weight of the evidence is in favor of the bulls, but with so many assets at inflection points, we're paying close attention to every new day's data as it comes in.
Starting at the US Index table, we can see the Nasdaq 100 $QQQ and Transports $IYT had a quieter week, while laggards such as the SMIDs caught a healthy bid, all up about 4.5%.
Seeing these long-term underperformers like Micro-Caps $IWC, Small-Caps $IWM, and Mid-Caps $MDY book such significant gains last week can only be viewed as healthy for risk-appetite.
Looking at the Russell 2000 $IWM, we can see buyers stepped in to defend the key $143 level.
Notice when the Russell 2000 rallied into August, it didn't reach overbought conditions, nor did it reach oversold conditions throughout the September weakness. In other words, while Small-Caps holding their risk level isn't a bearish development, it remains a messy chart, similar to many of the weaker major indexes.
If we're above 143 the risk is to the upside in IWM and a retest of the all-time highs near 173 looking like the next logical level.
The same could be said about the Dow Jones Transportation Average, which has been the standout performer over the last three months. This is an area we continue to like a lot, but it's certainly worth noting its recent weakness relative to the Dow Jones Utility Average recently.
While we continue to be very bullish on Transports as a group considering how well they've withstood the selling pressure in September, the point is that even the strongest of indexes are taking a breather.
SMID caps outperforming while Transports lag relative to defensive stocks is simply more evidence that we're dealing with a split market full of mixed signals for now, particularly from an index perspective.
It is important to reiterate that some mean reversion is a perfectly normal characteristic of uptrends. We always want to take a step back and remember that the structural trend in the large-cap leaders is higher despite the short-term trend appearing increasingly choppy.
So what's our Sector Table telling us?
Real Estate $XLRE, Financials $XLF, and Utilities $XLU - some of the weakest sectors off the March lows - were all the best performers on the week.
Our view remains that these sectors are still in primary downtrends relative to the broader market, so any short-term strength in these groups is likely not suggesting a structural reversion. Bottoms are a process, not an event.
Our time is better suited looking to the secular leaders that have recently pulled back like Consumer Discretionary, Technology, and Transportation.
Industrials $XLI and Materials $XLB, which have been some of the top performers over the last three months, underperformed this week. While these areas have built constructive bases relative to the S&P this year, there is still work to do before we can call these bullish trend reversals.
To justify being overweight in these sectors, we need Materials to reclaim their 2018 lows and Industrials to get back above their June highs relative to the broader market. If we're below, we think that's consistent with a market environment where cyclicals continue to lag their more growth-based counterparts.
Let's move on to the Industry ETF table.
There were two big standouts this week - Banks $KBE and Home Construction $ITB. The former is a secular laggard, while the latter is a secular leader. But both represent economically sensitive, risk-on stocks.
Home Builders are one of the most crucial industry groups in America. Their performance tells us a lot about the economy, and more importantly insight to the risk-behavior of market participants. To see their continued strength is most definitely a feather in the cap for bulls.
As the S&P 500 corrected in September, Home Builders broke out of a twelve and a half year base relative to the broader market. It seems logical to us that the S&P 500 will eventually follow the Home Builders and the entire Consumer Discretionary sector to make new highs.
In fact, look at how well Discretionary $XLY, in general, has performed not just off the March lows, but also over the trailing quarter.
It is leading all sectors across all market cap segments over both timeframes. And as much as I hate to crush the medias narrative, Discretionary on an equal-weight basis $RCD, which removes the "Amazon Effect" has outperformed its cap-weighted peer over both periods.
As the consumer makes up the vast majority of our domestic GDP, the world definitely isn't coming to an end with these stocks performing as well as they are.
Let's move onto our Factor ETF table.
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