Stocks still in good shape, but the market certainly feels like a Turkey

Technical Strategy Video:

Key Takeaways

• Trends and momentum have shown some minor deterioration lately, and could experience further weakness in the next 1-2 weeks, despite the bullish seasonality
  
• Breadth and momentum have waned lately as Small-caps have pulled back, and Software, Media, Telecom, Tobacco, Entertainment have been difficult areas of late
  
• US Dollar index and US Treasury yields are still pointed higher near-term, though further gains are expected to prove not as robust as recently

Minor weakness in SPX really has done little to no real damage thus far, despite how ugly this has felt for some in recent weeks. US equity markets do still look to have further consolidation ahead though in the weeks to come, and it’s expected SPX can reach 4566 near the 38.2% Fibonacci retracement of its October rally at a minimum ahead of a further push back to highs.

Technical reasons why US equities have struggled on a broad-based level, despite SPX returns

Traditional technical momentum indicators like MACD are negatively sloped while breadth has contracted sharply in the last couple weeks following a 10% rally since early October.

Elliott-wave structure seems complete from the early October lows, which could produce a 38-50% pullback to the Oct—late Nov rally. Meanwhile the larger count might complete in Dec-Jan which would give reason to believe a larger correction in early 2022

Broad-based strength back to new highs in groups like Financials, Discretionary, Materials, Industrials into early November brought these groups to overbought levels. Meanwhile COVID “4th-wave” concerns seem to have coincided with meaningful weakness in many Entertainment stocks, Casinos, Cruise-liners, Airlines, all areas of the market which remain technical laggards

Small-caps reversed very sharply in recent weeks along with NYSE Advance/Decline, showing that participation started to drop off meaningfully from early November

Technology reached important channel resistance in both XLK and the Equal-weighted RYT which has resulted in some recent stalling out in Technology. This could persist on further Treasury weakness.

Momentum has diverged on the push back to new highs in NASDAQ, while SPX, DJIA and Value Line have negatively diverged from the NASDAQ and lower than they were back on 11/8

Rapid escalation of bullish sentiment and some evidence of upside call buying/speculation returning specifically as Powell was renominated to his position of FOMC chairman

The hourly S&P chart above highlights the Wave structure since November 8. The violent pullback from Monday/Tuesday of this week remains important and negative in the short run for S&P as this resulted in the breakout to new highs failing and turning back lower. Value Line Geometric Average, the 1700 Equal-weight Index also has fallen about 3% in the last few weeks since 11/8.

Going forward, gains should likely be capped near 4705-4715 before turning back lower to make a decline that’s a ratio of this past week’s pullback in Fibonacci projected terms, with the idea spot targeting 4550-4565 but with maximum areas of weakness taking SPX down to 4512, or a 50% retracement of the Oct-Nov 2021 advance. At that point in early December, a push back to new highs is expected to commence.

Russell 2000 vs the SPX, in ratio form, as shown below, as proven to be nowhere near as strong as last year around this time, when Small caps showed some of the best returns of the last decade between November 2020 and February 2021. Despite the IWM intermediate—term breakout, we’ve seen this advance given back lately and this ratio is faltering, precisely at a time when many expected a Small-cap resurgence. To their credit, Mid-caps and Large-Caps are holding up much better, but will be important to watch in the weeks to come.

Retailing, meanwhile, remains under pressure heading into the Thanksgiving holiday, quite unlike its normal seasonal tendencies. Declines in stocks like GPS, JWN, BBY, PVH, RL, TJX, has proven to be quite negative for performance in these names, greater than 3% declines in the rolling five days, despite that Supply shock concerns might have caused many shoppers to do their holiday shopping early this year.

As shown in the daily chart of the S&P SPDR Retailing ETF, XRT below, Retailing stocks experienced quite the burst of performance from late October into Early November which resulted in a breakout in XRT. This was seen as quite bullish structurally. Furthermore, it’s important to note that this past week’s declines have NOT given back gains sufficiently to turn negative on Retailing by any stretch. This group’s pullback has now returned to the area of the breakout, which often represents an attractive risk/reward opportunity to buy.

Within the Retailing space, sub-groups like Department stores, Discount and Variety, Supermarkets, Jewelry and Building products remain the best part of the sector, technically. Meanwhile, areas like Restaurants, Home furnishings, Office supplies, Consumer Electronics, Apparel, and Mail order have all dropped off in recent weeks. Overall, it remains right to stick with the leaders and avoid the laggards.

Top stocks to consider technically include AMZN -0.64% , POOL -0.26% , ETSY 0.81% , DDS 4.61% , BOOT 3.59% , CROX -0.89% , SCVL 1.43% , AN 2.67% , HD -1.48% , HZO 3.32% , M 1.45% , WSM -0.14% , SHOO 0.99% , AZO -1.64% , AAL 3.65% , DLTR -0.37% , KSS 7.00% , and SIG 3.16%  as some of the stronger names.

Sector-wise, when examining the S&P GICS Level 2 groups, we see persistent strength in the Autos and Tech Hardware, while other areas within Technology have been hard hit, namely, Software and areas of Tech involving Communication Svcs. Financials came back sharply given a rise in Treasury yields that positively affected Banks. Meanwhile, Energy turned in some sharp performance late in the week that largely went unnoticed on a weekly level given some of the early weak declines. Yet, WTI Crude looks to be at a pivotal area, and as discussed in yesterday’s Energy report, should rally back to new all-time highs which should benefit this sector at a time when many continue to look elsewhere. Finally, the persistence of the rise in the US Dollar seems to have adversely affected Materials this past week, and Healthcare was also hard hit given pullbacks in names like ISRG -1.37% , DXCM -1.28% , TFX, ALGN -0.03% , A -1.35% , and XRAY. Healthcare weakness remains something to pay attention to (All of Healthcare, not just the lagging Biotechs) given its effect on S&P by weight.

Finally, this graph from “The Daily Shot” (Twitter) shows how Percentage of the Top five names in SPX now comprise the highest percentage in nearly 50 years. Thus, utilizing an equal-weight perspective when evaluating ETF”s remains prudent to avoid the dominance of the Largest cap stocks within.