Equal-weighted SPX looks to be on the verge of turning up vs. SPX

Another stellar week for stocks which showed increasing evidence of a broader-based rally being closer to getting underway.  As many know from the past month, the SPX and QQQ rally to new highs has been driven by just a handful of names.  However, it appears like this could be changing and I suspect that next week provides the time where Equal-weighted S&P 500 gauges could bottom out vs. SPY.  At present, this divergence isn’t too problematic given no evidence of leading stocks turning down, and SPX and QQQ maintaining recent uptrends.  Equal-weighted SPX managed to close today at the highest levels in nearly two years, and arguably should help jumpstart a broader rally while many are fearing markets have become too overbought.   

Have stocks truly gotten overbought?   Most momentum gauges would refute that notion, particularly when considering that Equal-weighted S&P 500 has largely gone nowhere since mid-December up until this past week.

Thankfully for market bulls, this gradually looks to be changing.  As shown below, Equal-weighted SPX just closed the week at the highest levels since Spring of 2022 after having churned for largely the last seven weeks.  This joins the Russell 3k along with MSCI World index in having pushed back to new all-time highs.

While breadth certainly did wane in the month of January from extended levels (as measured by the percentage of SPX stocks above their respective 20, 50 and 200-day moving averages (m.a.)), this waning of market breadth occurred in a way that resulted in precious little deterioration to the broader market.

SPX Relative Strength index (RSI) readings in the 70’s might seem problematic to those who feel overbought conditions can make indices vulnerable.  However, my studies over the years show the opposite to often be true.  The act of achieving overbought territory normally can signify the start of a strong move, vs. signaling a time to reduce exposure.

Given evidence of Industrials, and Healthcare having pushed back to new all-time high territory along with a constructive rally in the Financials, the US market certainly has been about more than just Technology of late, despite the hawkeye-like AI focus.

Bottom line, given no evidence of trend failure, and lack of counter-trend exhaustion, I feel that SPX and QQQ 0.60%  likely continue up into Presidents Day weekend before any real consolidation and NVDA 2.55%  earnings on 2/21 might have importance in this regard.  However, there could be some signs of mean reversion in Equal-weighted SPX vs. the cap-weighted SPX after a nearly two-month period of underperformance.  I’ll share a few charts below that support this view.

Initially, note that the RSP -0.08%  (Invesco’s Equal-weighted S&P 500 index) has just moved back to new 2024 highs today, but remains under all-time high territory (All-time highs occurred in late 2021/early 2022 and are not shown below).  This pattern in the short run resembles a bullish reverse Head and Shoulders pattern and likely results in Equal-weighted SPX showing a bit more upward momentum over the next week.  All-time highs occurred back in January 2022 at $164.90 and I feel this is a strong resistance target for the Equal-weighted S&P 500. 

Thus, while SPX cash index has been steadily climbing to new heights, the act of breaking out might result in RSP playing catch-up to SPX.

Equal-weighted S&P 500 looks to be close to turning back higher vs. SPY

Technically, I discussed the reasons in my 2024 Technical outlook why RSP might outperform SPX this year.  I still believe this is possible and this appears like a more attractive risk/reward at current levels.

As shown below, the ratio chart of RSP -0.08%  to SPY 0.12%  broke out briefly from November into mid-December 2023 before turning back sharply lower this year.

This week has seen RSP pull back to new annual lows vs SPX.  However, DeMark indicators on daily charts show that RSP could possibly signal downside exhaustion vs. SPY as early as next week.

I feel like RSP should be on the verge of turning back higher vs. SPY.  This might involve some temporary weakening in the Technology sector which dominates SPY, and if this occurs, it might begin sometime next week.  

The key takeaway from the chart below is that RSP seems to be nearing a possible area of strong support vs. SPY, and this might materialize next week before turning higher.

Is MPWR rally going to continue much further?

This is a stock investors need to pay attention to following the recent breakout given its past price history.  Most are clamoring to attempt to “find the next SMCI” which is no easy task, but one tool I often employ is to recognize when a stock has enjoyed a huge runup prior to basing.

MPWR 3.54%  rose from $165 back in early 2020 to nearly $600 within a two-year period, (+263%) then went sideways in a giant Reverse Head and Shoulders base from late 2021 into late 2023, before the breakout in December 2023 with its move above $580.  This resulted in a sharp spike to over $750 quickly.  However, no evidence of any counter-trend exhaustion is present on daily nor weekly charts after this week’s breakout,  and if one merely measures the current rally from early January this year and compares it to October 2023 bounce, it would be equal near $815.

Furthermore, if one expects a similar move percentage wise to the 2020-2021 rally, in percentage terms, that would allow for a move over $1400.  Those are rudimentary projection techniques, but ones I often employ to come up with technical price projection targets.  (I am not saying that MPWR should get over 1000 this year, but I do expect a move to $816, then consolidation, then further gains, overall, so I still find this attractive and the reason has more to do with its larger structure and breakout and volume, not the last few days of gains.)  Bottom line, MPWR looks attractive to me here technically for both a short-term and intermediate-term timeframe.  However, any pullback in the weeks to come would create an even better risk/reward proposition. 

Ralph Lauren also has achieved a lengthy base breakout this week

Ralph Lauren (RL -0.56% ) is also technically attractive on an intermediate-term basis following this week’s breakout of a very lengthy base.  The key for technical targets normally involves the initial breakout of a lengthy base, combined with a study of the volume and acceleration which accompanied the breakout. 

It’s worth pointing out that RL has been basing sideways since 2015, (nine years ago), so this high-volume breakout this week is impressive and should also put this stock on every investors radar.  

In this case, the upside potential might be capped on a short-term basis following a retest of all-time highs from May 2021 peaks near $193.  However, at a current price of $175.09 I still expect upside and feel that any decline to 150-160 would make this a very attractive technical risk reward.   Bottom line, RL is an appealing stock for 2024 and is attractive to own on pullbacks, with minor upside expected in the weeks ahead, technically.