Technical Backdrop Supports Increasing Cyclical Exposure

With each passing week, the technical backdrop continues to support increasing equity exposure to cyclicals.

Secular growth pulls back after surging through Q2 into late Q3 - Technology and momentum stocks are pulling back with a growing number of leaders breaking below their rising 50-day moving averages. Just a few high-profile examples include AAPL, MSFT, AMZN, NFLX, FB, GOOGL, ADBE and PYPL. My view remains unchanged regarding these secular growth leaders. I see their weakness as a normal, intermediate term correction in what continues to look like a longer-term bull market.

AMZN, NFLX and FB are just three examples of secular growth stocks than only emerged from this 18-month trading range in Q2-Q3 of this year. Overall, secular growth stocks have had an impressive surge from their March lows pushing multi-month/weekly momentum indicators into overbought territory through the summer and into September.

What I find noteworthy is that while the price for many of the secular growth leaders peaked in September, their relative performance highs versus the S&P 500 peaked in July or August. This is clearly illustrated by Amazon (AMZN) in the top panel of this week’s chart. This type of divergence where relative performance does not follow the price of a leading stock to new highs is often a telling sign that leadership is in the process of changing within the equity market.

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