Large-cap Growth breaks out vs Value; Semis still gaining ground

Despite all the near-term bearishness, it’s worth pointing out that Technology continues to show excellent relative strength vs the market.  Semiconductors remain an excellent sub-industry group within Technology, while AAPL 0.04% ’s upside gap makes this stock still quite bullish

SPX prices have not broken down sufficiently to suggest trends are turning down. SPX prices bounced sharply last week at the 200-day moving average, and Fibonacci 38.2% retracement level, and momentum remains bullish on a weekly basis.

Energy and Financials were a big source of weakness Wednesday, while Defensive groups like REITS and Staples enjoyed a rare day of outperformance.  Financials, as I’ll discuss later in this report, appear to be on the verge of larger breakdowns.

The US Dollar and Treasury yields failed to show any meaningful signs of backtracking;  Yet, momentum is truly starting to wane on long-term treasury yields.  An upcoming reversal back lower looks likely for yields, which should begin next week.

Weekly Equal-weighted S&P 500 chart shows how momentum remains positively sloped (per MACD) despite the minor backing and filling over the last month.  Unless 3928 is violated, it’s worth buying dips into early next week which is thought to bring about a cyclical low in stocks.

The weekly SPX chart is shown below, which remains quite healthy technically speaking.  The larger breakout from January takes far more precedence over the minor pullback on lesser volume since early February.  Momentum and breadth remain healthy and this weakness should prove to be nearing support within 3-5 trading days.

Large-cap Growth has broken out vs Value

If the last few month of Technology strength has taught us anything, it’s that Growth looks to be on a slow but sure road to recovery.

The Invesco Pure Growth ETF in ratio form to the Invesco Pure Value ETF has recently broken out to the highest levels of the year.

Technically, the act of having regained the area of prior lows while also having broken out above this ongoing five-month downtrend in Growth/Value are two factors which support the notion that Growth can continue rallying vs. Value.

This relative chart concentrates solely on Large-cap Growth vs Value, which has made the most progress in achieving a technical rebound.

If/when Yields start to roll over as I suspect they can in the weeks/months ahead, this should be further confirmation of growth starting to turn higher not just on a large-cap basis, but also mid-cap and small cap areas could show follow-through.

Mid-cap Growth vs Value should break out once yields roll over

Mid-Cap Growth has also moved up sharply in recent months, though has not shown the same degree of constructive breakout, technically speaking, as has been seen on the Large-Cap side.

Interestingly enough, however, ratio charts of the Ishares Mid-cap Growth vs Ishares Mid-cap Value have rallied up to test a very important level of intermediate-term trendline resistance.

As shown below, Mid-cap Growth has been trending lower vs. Mid-Cap Value for nearly the last 2.5 years after having peaked out in 2020.  This served to give an advance warning about the potential of broader market weakness ahead of time, given the weakening in Small (and in this case, Mid-Caps) that typically happens ahead of Bull markets turning lower.

This ratio chart has made progress to a very important spot that has marked resistance for this two-year downtrend.  Any breakout of this larger downtrend would be quite bullish for Growth from a Mid-cap perspective, and it’s expected that Technology could continue to make inroads.  Small-cap Growth is likely to eventually play catchup and make a similar bullish breakout.

Financials downturn bears watching carefully

One technical negative this week concerns the degree that Financials have now violated the uptrend driving this group higher from last October lows.

Equal-weighted Financials ETF by Invesco is shown below (RYF)  This sector has officially broken the bullish uptrend from last Fall’s lows, which could have importance given Financials size within S&P 500. 

At present, it’s not expected that prices require a retest of October 2022 lows;  However, it’s just worth pointing out that this sector has gotten a bit weaker over the past week.  Financials might very well rebound.  However, it’s thought that Investment Brokers should do better than Commercial and regional banks along with Insurance.

Regional banks have been particularly weak lately, despite yields having turned higher.  This is opposite of what‘s happened on prior yield spikes, and gives a bit more concern about the potential for outperformance in Financials.

Importantly, relative charts of RYF vs SPY have not technically broken support that would argue for material underperformance from this sector.  However, ratio charts of RYF/SPY (not shown) are treading water towards the lows of this pattern and will be worth paying attention to if a breakdown in Financials vs SPY happens in the next few weeks.

At present, it’s thought that Healthcare and Energy are two sectors which should likely take Financials place to outperform as yields roll over to buoy the market.  Yields turning sharply lower would likely result in further near-term weakness out of Financials.

This is a two-edged sword of course.  Treasury rallies likely could help US stock indices start to turn back higher.  However, they also might drive underperformance in Financials, which is roughly 12% of SPX.  (Chart of RYF shown below).

Check out my CNBC interview yesterday (3/7/2023) linked here.