The choppy near-term consolidation over the last week remains ongoing as February was officially closed out with SPX lower by nearly -2.5%. Yet, downside likely should be contained near 3920-30, an important area of support which could represent a bottom to this February decline.
Elliott wave structure still argues for a potential “final’ pullback to test and break last Friday’s lows; However, this would be quite constructive to buy dips for a March rally. Any rally back over 4060 suggests a move back to test and exceed February highs.
Yields largely have stalled out with Treasuries seeing firm “bids” at the 4% level. A break under 3.84% in early March is expected which should drive an SPX rally back to test and exceed February highs.
Despite this churning, SPX largely has made no progress over the last couple weeks. However, the lack of declining further with any real downward thrust is considered bullish when Mid-Caps and Small-caps have been acting quite well.
Sectors like Industrials have broken out vs. SPX in equal-weighted terms. Meanwhile Utilities have broken down to close out February with the 2nd worst performance of any major sector outside of Energy. Despite some minor relative strength out of Staples, other defensive groups like Utilities, REITS, and Healthcare all underperformed sharply.
Meanwhile, Technology proved to be the best performing of any of the major S&P SPDR ETF’s. While all 11 S&P SPDR ETF’s closed out February with a loss, Technology was down a scant -0.13%, outperforming S&P 500 by over 200 bps.
Energy is growing closer to bottoming, and should do so in March as Crude starts to lift in a seasonal advance. Meanwhile, Healthcare also looks very close to bottoming after severe underperformance by many of the US Large-Cap Pharmaceutical names.
Specifically with regards to SPX, the two key levels to pay attention to as March gets underway are 4060 on the upside, and 3920-30 as a zone of downside support. It looks possible that the downside level could be tested first.
However, momentum has begun to stabilize given the lack of downward thrust on this recent decline given recent stabilization, both in Equity prices as well as Treasuries. Any pullback down to new weekly lows should result in positive momentum divergence and line up with the 60-year cycle (1963) bottoming as March gets underway.
Industrials have broken out in Relative terms to S&P
Industrials looks quite attractive as February has come to a close and looks poised for some above-average outperformance vs the broader market as March gets underway.
Equal-weighted Industrials ETF by Invesco (RGI) has made a large breakout vs. the Equal-weighted S&P 500 over the last week. This makes it highly likely this group shows further relative strength and appears to be one of the better sectors for outperformance in March.
While Industrials comprises a low percentage of SPX, this breakout looks important. However, it might not be driven by recent outperforming names like GE, BA, or even URI.
My favorite Industrials names at the moment from a technical perspective are as follows: ETN 0.29% , PH 1.80% , IR 1.25% , ROK -0.23% , DE 1.10% , GWW 2.43% , TDG 2.03% , PWR 0.07% , LMT -0.16% , and PCAR -1.27% .
The Aerospace and Defense stock NOC 0.54% has been a definite laggard, and unless this snaps back right away in the next couple weeks, other names like LMT, or GD or TDG should be better candidates for outperformance within the Aerospace and Defense sub-industry.
Interestingly enough, some of the laggards like MMM, HON, EMR and CAT lately are not all that attractive just yet technically. These stocks likely will begin to stabilize and turn higher. Yet, it’s the aforementioned list that garners top attention for me at this time, technically speaking.
Without delving into the fundamental reasoning of “why” this group is attractive, I’ll simply let this weekly relative chart of RGI vs RSP speak for itself. This advance has cleared 2021 peaks vs the SPX and actually goes back to exceed former peaks in 2008 (not shown). Daily and weekly exhaustion are premature, making this sector still appear like an attractive “bet.”
Utilities continues to lag. February closed out with this sector having fallen to new monthly lows
Most of the market bears have a big problem in as far as lacking the necessary sector rotation towards expecting that a large decline is forthcoming. In plain English, I simply mean that defensive groups like Utilities, REITS, and Healthcare have not been doing that well and continue to lag performance.
Consumer Staples, to its credit, did show some relative strength in February. However, defensive sectors are still underperforming sharply while Technology is outperforming. Until this changes, it’s thought that any stock market weakness proves minor and turns back higher in March.
As daily charts of the Equal-weighted Invesco ETF (RYU) shows below, Tuesday’s selloff to the lowest levels in more than three months is bearish, technically speaking. No evidence of any low in Utilities is present, and further weakness looks likely in March.
RYU, shown below, might decline to 104, while the traditional SPDR S&P ETF, XLU 0.52% , could decline to $60.
Performance laggards continue to be concentrated in Defensive sectors
Interestingly enough, when ranking the one-month performance of the major S&P SPDR ETF”s for February, we see that Energy was the worst performer of any of the major sectors, and one of just four sectors with YTD losses thus far after two months.
Utilities, Real Estate and Healthcare are the next worst, which certainly suggests no real bid for defensive groups at a time when sentiment has turned bearish.
Meanwhile, Technology at the bottom of this ranking was the best of any of the major sectors for February, outperforming SPX by more than 200 basis points (b.p.)
This kind of sector performance is at odds with the SPX’s~(-2.5%) decline for February, and actually looks quite healthy in my view.
Note that Industrials is second to Technology in relative performance. Both Sectors likely shine in March, as stock indices bottom on the US Dollar and rates rolling over.
