The selloff took a turn for the worse with Monday’s breakdown to new multi-day lows for SPX, DJIA and QQQ. Nine of 11 major S&P Sectors fell more than 1% on the day, while four sectors, Financials, Industrials, Discretionary, and Technology dropped more than 3%. While the trend over the last week had been largely more sideways than bearish, Monday’s drop undercut SPX 4250, turning trends more negative. While I expect weakness should prove short-lived at this point, it is right to have a defensive stance until SPX can reclaim 4250 on a close. Pullbacks look to have a good shot of testing and undercutting late February lows, with the most meaningful support under 4114 from 2/24 found near 4000, a level which would allow for wave equality. Overall, having a “bullish over 4250, bearish Under” stance makes sense until more evidence of support arises. Longs should be focused in “Utes”, Energy and Defensive groups.
Recent Technical Developments worth highlighting
The churning of the last week gave way rapidly to selling on Monday, which appeared very much like the start of a capitulation—like wave lower as multiple groups which were holding near support broke down to new multi-week or multi-month lows.
Russell 2k has been strengthening relatively speaking vs QQQ which speaks to the recent deterioration in the “FAANG” group, which doesn’t look complete.
Financials, Semiconductors, Retailing, Airlines, Casinos have broken down to new multi-week lows and all look early to buy (in some cases, multi-month lows).
US Dollar has accelerated after breaking out above late January peaks and is growing close to resistance with momentum at stretched levels while EURUSD reaches key trendline support.
Emerging markets like China have come under pressure lately, while LatAm markets largely have held up relatively better.
Sentiment readings remain bearish, though arguably still no convincing evidence of capitulation with TRIN (Arms index) readings below 2, while Equity Put/call readings remain under January peaks.
Last week’s AAII readings showed a contraction in the negative Bull/Bear spread, and Bullish readings reached the 2nd highest levels of the year.
Momentum rolled over to negative on Monthly charts, so daily, weekly and monthly MACD are negative at this point.
DeMark indicators which gave a temporary “buy” signal on QQQ vs. SPY, looks to have been stopped out, suggesting QQQ likely underperforms in the short run.
Commodities remain stretched, though insufficient weakness to think these are rolling over and it’s right to stick with this trade, technically despite many being stretched.
Financials Equal-weighted ETF, (RYF below) violated lows going back since last Fall. This is a bearish development in SPX’s third largest sector by representation. Near-term, it looks right to avoid the Money Center banks, and Investment Brokers in favor of Regional Banks and Insurance names.
Small-cap Russell 2000 ETF (IWM) has broken out vs QQQ which argues for near-term relative outperformance in the Small-cap trade. Most of this technically is playing out as greater weakness in Large-Cap Technology stocks, many like AMZN, or MSFT, GOOGL are starting to show increasing amounts of weakness. Near-term daily charts of most US “FAANG” names, with the exception of AAPL, are now within striking distance of February lows, and daily charts of the QQQ show this likely to weaken down to 315, and then 300 before this can bottom. Overall, Small—caps likely outperform the NASDAQ 100 QQQ in the short-run while this weakness in QQQ happens but should prove short-lived and buyable in the near future.
Utilities continue to show strength and are an area to overweight while this volatility is playing out. Technically the trend towards Defensive names was one of the key warning signs that this selloff might require more downside before being complete. The relative chart of Invesco’s Equal-weighted Utilities ETF (RYU) when plotted in ratio form vs SPY, made a very significant breakout just in the last couple weeks after meaningful base-building consolidation since last Spring. This surge in Utilities looks important and positive and should likely continue to help this group show better than average strength.
As discussed last week, my favorite Utility names are DTE -0.21% , FE -0.12% , ATO -0.70% , SRE -1.40% , NI -0.51% and CMS -0.45% .
