TECHNICAL FLASH - Sluymer - Market correction, levels, VIX, VXN, Real yields bottoming?, High Beta emerging, relative screens favor cyclicals
September certainly looks to be on track to live up to its historical reputation of being volatile!
However, despite this week’s painful sell-off, we see a number of encouraging technical developments underway and see support for the rotation toward cyclicals developing in the bond market.
As reminder, our long-term outlook remains unchanged viewing the March lows as a major market cycle low consistent with a typical 4-year cycle bull market. Volatility/weakness in September, while painful, is likely a healthy pullback consolidation that needs to develop for the cycle to continue and is tactical in nature not longer-term. We continue to recommend a barbell portfolio favoring secular growth AND cyclical growth with cyclical growth the more attractive risk reward area to increase exposure through year-end. This week’s market volatility continues to support that view in our opinion as outlined by the charts below.
A non-random walk through this week’s key technical chartsCharts 1 and 2 – S&P and Nasdaq are collapsing to next trading support levels while volatility indices (VIX and VXN) are well ahead and at next technical thresholds after diverging to the upside through August. We would not be surprised to see the 3-day rule take effect. Steep sell-offs often take at least three days to wash out the panic sellers and with a long weekend, we would not be surprised to see global markets remain in a funk into the beginning of next week.
Chart 2
Chart 3 – Our proprietary weekly Quadrant Balance indicator, a useful barometer of 1-2 quarter trends, suggests a broader equity rebound is on track for Q4 as that indicator works into oversold territory. Cyclicals peaked in June, growth smid-cap growth vs value peaked in early August and large-cap growth peaked reversed this week. A choppy September remains likely but our expectation is for a strong finish to the year.
Chart 4 – US real bond yields are showing very early signs of bottoming as daily RSI positively diverges – What is particularly noteworthy is the inflection points high beta (SPHB) has versus low volatility (SPHL). High Beta is now leading to the upside versus low volatility, further reinforcing our view to increase exposure to more cyclical groups and stocks within the market.
Chart 5 – The TLT bond ETF continues to track the profile of a long-term cycle peak at the upper end of a 2 standard deviation channel
Chart 6 – Growth vs Value – Mid and small-cap growth vs Value peaked in August diverging from large-cap growth and continues into this week – A pullback to the rising 200-dma is likely into Q4.
Chart 7 – S&P 1500 GIC level 4 high momentum, leadership groups broadly making new multi-week (column D) – It is premature to conclude this week’s weakness in these leading groups defines a long-term peak. Beyond mere speculation there is simply insufficient technical evidence to conclude technology, housing related, home furnishing, semiconductors or any of these groups are developing long-term tops. We view this weakness as tactical in duration after an impressive surge through Q2 and Q3. There’s nothing wrong, in our opinion, of leading groups consolidating their gains.
Chart 7 – S&P 1500 GIC level 4 high momentum, leadership groups broadly making new multi-week (column D) – These groups are leading to the downside but, to be clear, it is very premature to conclude this week’s weakness defines a long-term peak. It’s possible, of course, BUT beyond mere speculation there is simply insufficient technical evidence to conclude technology, housing related, home furnishing, semiconductors or any of these groups are developing long-term tops. Tops are process and we do not see the technical case to conclude cycle peaks are in place at this time. However, we do view their weakness as tactical in duration after an impressive surge through Q2 and Q3. There’s nothing wrong, in our opinion, of leading groups consolidating their gains.
Chart 9 – S&P 500 & 400 stocks making two week or higher relative performance highs vs the S&P 500 (column D).
This list is a relative performance screen initially sorted by the long-term performance trends (column A) to help identify leaders that are either accelerating or emerging vs the S&P 500 for core and growth managers and laggards (bottom of column A) that are showing evidence of bottoming for contrarian/value managers. Note the DQM Quant listings managed by our data scientist Ken Xuan are on the second column from the right and Brian Rauscher’s Earnings Revisions Model (ERM) ranks are on the far right column for a fundamental screen.
Ideas
Leadership Established up: ideas for growth managers: NKE, ISRG, KSU
Emerging – Early up: BWA, DLPH, CAT, CHH, TXRH, SIVB, EW, FIVE, MS
Contrarian Value – Established down with early signs of turn (+): WYND, JBLU, ALK, UAL, CCL, RCL, NCLH, ZTS, AXP, DFS.
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