Key Takeaways
- SPX and QQQ rally has exceeded near-term targets but has not really been matched by broader market. Calling for a move back to new all-time highs still looks premature
- “War Trade” still early to call an end to, and commodity pullback represents buying oppty
- Technology strength important for SPX, but has not thus far recouped prior support.
SPX and QQQ look far stronger near-term than broader-based indices like the Value-Line Geometric Average, yet short-term technical progress still hasn’t given the “green light” to suggest pressing gains for all-time highs. To that measure, price action also still hasn’t given much of a reason to sell from a near-term technical perspective, and the bounce continues. Looking back, index prices have surpassed areas I thought might be important. Additionally, volatility gauges like CBOE’s VIX fell to multi-day lows and remain early to “buy” from a DeMark perspective. Overall, Tuesday’s gains keep near-term trends heading higher, though it will be important to see more participation and progress out of Technology and the Equal-weighted Indices like Value-Line Geometric Average before thinking lows are in for this Spring, and weighing in that the worst is behind us. That remains very much premature.
Key Takeaways given recent US Equity index strength
- I feel it’s technically encouraging to have seen US indices rally back as much as they have (This doesn’t match the broader equal-weighted gauges, but has surpassed my expectations) This has improved short-term breadth and momentum gauges
- Given the extent of the rally, this doesn’t suggest a move back to new highs is imminent and the lows for 2022 are in
- It’s wrong to attempt to short into prices tactically without any evidence of proof. Even in the short run, one needs to see at least one day of prices failing to move higher and closing down at (ideally) a multi-day low for initial evidence that a trading top could be near
- Being Defensive, by and large, has worked, and this shouldn’t be confused with trying to short markets. (Utilities, REITS remain standouts, as is Pharmaceuticals within Healthcare.Tech has underperformed over the last month
- It’s right not to put so much emphasis on day-to-day direction of SPX given a wide variety of things that are doing just fine. Correlations remain low and many different sub-sections of many indices are working well, so one looks to have ample options of owning subsectors that can outperform technically
- It’s hard to justify new longs on indices here, near-term given the following:
- Near-term Overbought momentum, while Weekly, Monthly MACD negative
- Cycles show confluence between now and 4/5 for some kind of turn
- Technology has not rebounded sufficiently to recoup the area that’s been broken, relatively vs SPX.
- Sentiment has snapped back to much more optimistic levels but seems bifurcated (Still high levels of hedging, while upside call buying on Russell has been pervasive – Thus, both bearish and bullish bets)
- Short-term breakouts on DJ Transportation Avg. and Russell 2000 along with much of Europe having bounced back are encouraging, but each of these maintains its own near-term technical hurdles
- 2’s/10’s curve inverted, which often foreshadows a recession by 8-12 months, yet doesn’t have much short-term significance
- Markets have clung to the positives of a possible impasse in Russia/Ukraine invasion and rallied specifically given reports of Russian troops temporarily pulling back from Kyiv. However, there has been no decisive news of any meaningful ceasefire and no agreement is in place, nor has any date been set for any talks between Putin and Zelensky.
- Finally, and maybe most importantly, the huge breakout in Commodities vs. SPX late last year has shown just minor consolidation lately but maintains a very positive trend, and given no Russia/Ukraine détente, makes it difficult to not embrace commodities and seek to buy all dips given the chance
Overall, the conclusion is that more is needed to go from bearish tape to bullish, and one shouldn’t be quick to press the accelerator for a possible move to new highs. Markets change slowly, and this one’s no different. While it’s right to endorse the bullish developments, it’s also proper not to ignore technical problems. Let’s take a look at the most important sector within SPX below: Technology.
Tech bounce, although impressive over last week, still fails to impress over the last month
One of the most important areas of the market, Technology, broke down sharply but has only made a lackluster bounce attempt higher. As discussed yesterday, despite a strong one-week showing, Tech has still lagged groups like Utilities and REITS on a longer-term basis. As shown below, Invesco’s Equal-weighted Technology ETF (RYT) Last week’s gains don’t signify a chance to press Tech trades for a move back to new highs, as these kinds of sector rotations take time to materialize. The larger breakdown on the relative chart of RYT vs ^SPX 0.91% below has attempted to stabilize but remains lower than the uptrend line which had been broken. Given that Technology represents 28% of SPX, seeing this group strengthen sufficiently not only in “FAANG” issues but also in Software might help this recover enough to trust the rally.
At present, more needs to happen, and it still doesn’t warrant a big overweight for the next couple months. (Note: I had highlighted Technology as 1 of 4 sectors to overweight for the year. Others like Materials, Energy and Healthcare have thrived, though Tech has been under pressure. Given the ongoing negative slope in Growth vs Value and broken relative charts in Technology vs SPX, it will take some time before this has been resolved.
“FAANG” index (NY FANG index + Microsoft) has bounced, but requires more to have conviction that FAANG should outperform
Interestingly enough, this recent sharp bounce we’ve seen in my “FAANG” Composite still hasn’t strengthened sufficiently to think a push back to new highs should be imminent. While prices are now bouncing for the third straight week, current levels lie near downtrends from last November. Stocks like AAPL have now rallied for the 12th consecutive day, one of the largest winning streaks in more than a dozen years. Yet other stocks like FB, NFLX have only made scant recoveries.
As shown below on “My FAANG index” (NY FANG index + Microsoft) this composite broke down relatively back in January and has not yet recouped its prior damage when eyeing this index in relative terms vs. SPX. Both in absolute terms (top part of the graph) and Relative to SPX (bottom half of this graph) this composite is back up to test this important downtrend. It looks difficult to press longs here in “FAANG” given prices having rallied to test the area of the downtrend. Therefore, more needs to happen to have an overweight in this part of Technology. I’m fully willing to endorse positive developments when they occur and will be watching.
Precious Metals decline back to monthly lows likely puts additional pressure on the Metals, signifying it’s probably still a bit early to average into existing longs. Metals have declined along with the commodity trade this past week, as Oil, grains and Metals have all fallen. Yet, this shouldn’t be a time to avoid this space, given lack of any significant news flow announcing a Russian/Ukrainian ceasefire.
The Elliott-wave structure in Silver, shown below remains in a corrective move lower, as seen by the initial three-wave decline followed by the three-wave advance. Our recent pullback, should represent a chance to buy dips, though one can’t rule out weakness in the next couple weeks, which would represent a buying opportunity.
Overall, the near-term conviction remains unclear that this is the ideal spot to average into longs, though from an intermediate-term view, this looks proper and expect downside proves minimal in the weeks ahead. Gold and Silver share similar charts, with both having plunged under March lows Tuesday before attempting to rally late in the session. Given my views on buying the commodity trade on weakness, both will grow even more compelling for intermediate-term investors on additional drawdowns for those to average into longs for an 8-12 month long trade.
