Over the past few weeks, I’ve been highlighting the importance of monitoring short-term/daily momentum indicators to track 2-4 week directional swings in the market. Normally, I would not focus so much attention on short-term technical indicators, but in the current environment, multi-week swings are materially impacting clients’ portfolios and another upside turn is likely developing.
The Nasdaq, of course, has continued to trend strongly to the upside through July while most cyclicals have corrected from the highs on June 8. However, investors should be prepared for a rebound in cyclicals to develop through the balance of July.
Why? After peaking in early June, short-term momentum indicators began to bottom two weeks ago as the S&P 500, along with most cyclicals, bounced from support near rising 50-day moving averages. Over the past week most cyclicals retraced most, if not all, of the prior week’s gains raising the question of whether an entirely new downside move is underway.
I continue to caution investors from becoming overly bearish and view the 2-week “W” pattern visible in the Russell 2000 as a consolidation above support and not a breakdown. Time will tell of course, but I encourage readers to view the glass as half full given our longer-term cycle backdrop remains bullish and many key cyclical indices have mostly churned sideways to support at their rising 50-day moving averages.
As proxy for cyclicals overall, this week’s chart is the Russell 2000 ETF (IWM), which is at another important short-term inflection point in my opinion. The consolidation over the past two weeks is beginning to ‘dig in’ and hold support at its 50-day moving average which I expect to support further upside into next week through the end of July.
Daily momentum indicators in the top panel are turning up which generally supports another upside move over the coming 2-4 weeks.
Bottom Line: After a correction through June into early July, the technical backdrop is in the early stages of supporting another rotation toward cyclicals.
Figure: Weekly Sector Review
Source: Fundstrat, FactSet
Figure: Best and worst performance sectors over past 3 months