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Key Takeaways
- Minor stalling out for Equities coinciding with VIX spike not too concerning; A push back to 4750-65 looks likely into mid-November before any stalling out
- Two sectors to favor: Homebuilders and Leisure Sports equipment companies . The stocks in these groups look compelling technically and are likely to outperform
- Breakdown in Treasury yields as yield curve flattens something which merits attention Meanwhile, Natural Gas cracks support & should weaken further into end of year
Minor stalling out in SPX has tested last Friday’s lows, representing the first move to new three-day closing lows in nearly a month. Additionally, the NASDAQ was down Tuesday the most in two weeks. Importantly however, patterns and wave structure have not suffered any damage, and SPX still looks to lead higher up to 4765 area.
Overall, Tuesday’s decline does little to change the underlying structure. The VIX spiking more than 20% over the last four trading sessions is interesting on this slowdown, but little to no deterioration in Technology, Financials, nor Healthcare means it’s right to stick with this move, despite near-term overbought conditions.
5 sectors still rose on the day and breadth, while negative, was largely flat, not even 3/2 negative. Defensive groups like REITS, Utes, Staples did manage to strengthen today, though largely been areas to avoid with relative charts in many of the defensive groups vs SPX still at decade lows.
Sector-wise, Homebuilders continues to stand out as one of the better groups to favor near-term. XHB, the S&P SPDR Homebuilders ETF, just managed to close at new all-time highs, and further strength is likely up to technical targets near 90. Technically, this ETF just broke out of a symmetrical Triangle pattern as of Tuesday’s close, and rates dropping off in recent days makes for a good case to own the Builders. Finally, Fundstrat’s own Tom Lee has been endorsing this group for many reasons (Deurbanization, Housing Shortages, Seasonality) which helps to add to the technical conviction.
Interestingly enough, many of the high-flyers like LOW, HD, BLDR, and AOS within Home construction/Building look to be overbought and stalling, while others like MAS, LEN, PHM, and DHI look more compelling technically from a risk/reward perspective. XHB shown below.
An additional group to take a strong look at centers on Retail-Leisure. This has been showing above-average strength lately and looks attractive to position long, particularly in many of the sporting goods companies. Attractive stocks within this group include ASO, DKS, POOL, VSTO and BGFV. The chart of BGFV, or Big 5 Sporting Goods, is found below. This is quite appealing technically given the breakout of this massive triangle pattern since Spring of 2021 and the width of this formation makes this compelling to consider given its recent breakout on heavy volume. Strength up to the high $40’s looks likely initially.
Natural Gas decline breaks support, putting further weakness into play. Natty peaked out as per the cyclical composite I discussed last month and the break of triangle support suggests lower prices should be in store headed into December. Additional near-term weakness looks likely down to trendline support initially, while breaks of 4.40 would be more negative.
