Retail continues to be a drag on Discretionary

Trend still bullish –  Expecting upcoming push back above SPX-4200 –

While many would correctly call the sideways grinding in US Indices like SPX neutral since early February (and prices are nearly unchanged from those levels), the path of least resistance remains higher.  Despite the lack of a debt ceiling solution, the resilience in equity indices means that most indices aren’t incorrect to be holding up nicely.  (as there’s no saying that prices have to mean revert lower.) Rather, most bearish prognosticators are just wrong, in my view.

NASDAQ Composite has given a much different look than SPX or DJIA and has risen to the highest levels since last Spring.  However, equal-weighted indices like Value Line’s Arithmetic Composite have lagged the NASDAQ substantially and remain well below February lows.

Overall, both are important to take note of. Large-Cap Technology has indeed managed to provide much of the strength in US Equity indices over the last month, which is a positive given its weight.  However, other groups will need to step in and pick up the slack at some point.

Financials showed some introductory evidence of trying to bottom out and this is an area to watch closely, which would provide a near-term tailwind given Regional banks trying to bottom.  As noted last night, KRE -0.87%  has both daily and weekly TD Sequential and TD Combo exhaustion signals (“13 Countdown” or what some might refer to as “buys” ).

Healthcare is entering its seasonally best time of the year, and Medical Devices, Biotechnology and Pharmaceuticals should be favored for relative strength over the next month. 

Importantly, QQQ 0.49% , shown below, has reached my 328 target, and is now within 1-2 days potentially of completing its DeMark related Sell Setup just as TD Combo signals have arrived.  This could be a technical negative if confirmed, and prices start to turn lower.  At present, the TD Combo Sell has not been confirmed. 

However, it wouldn’t be surprising to see QQQ and Technology take a possible “breather” and consolidate for a few weeks, which could offer some attractive risk/reward opportunities to buy dips.  Overall, it’s thought to be unlikely that QQQ immediately rallies to surpass last August 2022 highs.  Therefore, some upcoming stalling out looks very possible.  (I alluded to this last week given stocks like AAPL up to just below prior highs at $176.)

Bottom line, keeping a close eye on QQQ 0.49%  is imperative in the weeks ahead.  Any break of the current uptrend lines would warn of downside consolidation in large-cap Technology, which might weigh on indices. 

Retail remains under pressure; Upcoming test of monthly lows appears imminent

Retail has been out of favor for nearly two years, and this daily chart of XRT has shown increasing evidence that a move down to test (and possibly break) monthly lows is now within reach.

Daily charts show the ongoing pattern of lower highs following XRT’s attempt to bottom out last December 2022.  The failure of XRT to rally at a time of strength within Consumer Discretionary is certainly a technical concern.

Breaks of May lows in XRT likely lead to 55-56 on an absolute basis before Retail can bottom.

Overall, selectivity is important when favoring this sub-industry within Discretionary, until XRT can begin to act better.

Ratios of Retail to Consumer Discretionary remain pointed lower, suggesting selectivity is important

When examining relative charts of Retail vs. Discretionary, trends have pulled back sharply in this ratio for nearly two years after an initial sharp bounce off the 2020 lows, which ended in 2021.

DeMark related exhaustion suggests that a bottoming out process for the Retail group remains elusive, and further near-term underperformance is likely, when examining Retail vs. Consumer Discretionary.

Those attempting to own Retail should consider sticking to the areas of outperformance found in Restaurants, Wholesale-Auto Parts, Leisure or Discount & Variety.  These remain some of the more attractive areas of Retail technically.

Conversely, Consumer Electronics, Apparel, Department stores, Drug Stores, Home Furnishings, Jewelry and Wholesale-Office Supplies all look to be underperformers within Retail and should be avoided, technically speaking.

My favorite technical names currently among the large, liquid parts of Retail are as follows:  CPRT -0.04% , ORLY -0.66% , AZO 1.79% , PAG -0.16% , LULU -0.20% , ASO 0.07% , YUM, ABG -1.58% , CASY 1.01% , DLTR -3.07% , WEN, DRI -0.39% , QSR 0.03% , ETSY 2.15% , and SHAK 0.88% (the latter two are counter-trend plays).

However, selectivity remains important until Retail can begin to stabilize, and it should be reiterated, that despite the names above being attractive in my view, they’re part of a group which is decidedly not all that appealing at this time.

US Dollar index nearing resistance;  DXY likely stalls and reverses course near 103.50 before falling to new lows

Recent strength in the US Dollar looks temporary, and is slowly but surely nearing an important area of resistance which likely causes a stalling out and turn back lower in the DXY.

As seen below, DXY has not broken the downtrend from last Fall and is now approaching an area of Ichimoku resistance directly above.  This likely will cause some slowdown in this week’s bounce.

Elliott-wave projections are still bearish and it’s difficult to make a strong technical case that lows are in, given the corrective bounce (which still looks negative) along with ongoing downward sloping momentum.

While sentiment has started to get more negative on DXY, it’s likely technically that price moves briefly down to new lows on DXY into June before stabilizing and turning back higher.

On an intermediate-term basis, it’s unlikely that DXY undercuts 97 before mounting a sharp rally, which I believe takes place in the second half of this year.  For now, EURUSD and GBPUSD likely find support this week and start to turn back higher.  USDJPY likely turns back to the downside and will test monthly lows.  Upside targets for EURUSD lie near $1.1250.