After the better than expected employment report out Friday, there are key index levels to focus on. Investors should continue to focus on the more important technical event developing within equity markets, the rotation toward oversold/bottoming cyclicals.
1) Market Key Index Levels: Friday the SPX was pushing above short-term resistance at the March 4 bounce highs of 3130. Next resistance is at 3259, 3328 then 3394. Support levels are 3100, 3006, 2934.
What would suggest the rally is slowing? Short-term momentum indicators remain positive but a 1.48% decline by the SPX would be needed to suggest the rally is decelerating. My expectation is that any pullback will likely be shallow, short-lived and an opportunity to continue building equity exposure, given the improving longer-term and intermediate-term trend and cycle backdrop currently in place. For some stock names, please see pages 3-4.
2) Style rotation – The intermediate-term trend of Growth vs Value has been well advanced above its 3-year trend for many weeks but is now showing evidence of mean reverting. Nevertheless, there is insufficient technical evidence at this point to signal this move is a much longer-term reversal. Simply, catching up to the 40-week sma and/or linear uptrend will meaningfully impact portfolio performance into YE.
3) How much farther could Growth fall vs Value? There’s no magic number, but using the 200-day moving average as proxy for the intermediate-term trend a break below the 50-dma could see a ~12% decline.
Sector and group rotation: There remains a relative performance improvement that has been developing since May 15th for cyclicals and a weakening relative performance of safety sectors (utilities, staples and more recently healthcare)
The key takeaway is that while many cyclicals have surged recently from oversold levels financials, consumer discretionary, industrials, materials and energy are still early in intermediate-term, 1-2 quarter relative performance uptrends with most pressing to multi-week relative highs recently. While some might become overbought short-term in absolute price, we believe it’s important to stay focused on the bigger tactical trends developing.
In Technology, the more secular growth groups are showing evidence of decelerating while the more cyclical Semis remain in an established up trend BUT are continuing to notch multi-week relative performance highs. We would recommend tech investors continue to add to Semis.
Bottom line: Continue to increase exposure to cyclical, using safety stocks as a source of funds.
