Key Takeaways
- QQQ starting to kick into gear and outperform SPX as Technology outperforms.
- Growth has broken out of 2-month downtrends vs Value which is a positive.
- SPX pullback of 20% into May 20th fits in near the average drawdowns of mid-term election years and of 20-, 60-year cycles, which were down 25-30%.
The recent outperformance in QQQ and Technology has not gone unnoticed, and likely continues into this month’s FOMC meeting before some necessary consolidation. Despite how choppy this market has felt lately, it remains higher by 7% in the last two weeks than the 5/20 intraday lows. Technology has been one of the largest leaders in performance on a rolling 5-day basis, with SPDR Select Sector ETFs like XLK up by more than 3%, second best only to Consumer Discretionary. QQQ is now nearing the all-important former February lows near 318. Bottom-line, a bullish near-term view remains likely, expecting QQQ to rise to technical targets near 326 before some post FOMC weakness. The bottoming process for US stocks is definitely underway.
Growth turning up vs Value is noteworthy
Don’t look now, but Growth looks to be breaking out vs. Value on recent Technology strength. While this will require a lot more progress to suggest that a meaningful period of outperformance has begun, it does appear like a constructive development, and merits starting to bottom-fish on growth names that look appealing.
Ideally, this ratio trends up into mid-month near the FOMC meeting, then lower into late June. lining up with the Russell rebalance at the end of Q2, along with meaningful cycles set to bottom based on the 60- and 90-year cycles which target late June/early July.
Energy is expected to start turning lower given technical overbought conditions. with WTI Crude up near key levels, while OPEC+ meetings seem to suggest supply is headed higher (Saudi Arabia agreed to increase output by 648,000 barrels a day in July and August; this would be a 50% rise in oil supply and should coincide with Crude oil dropping). Thus, this key component of Value dropping would further help Growth’s recent dominance to improve.
Overall, this will be a work in progress, but fully expect that Growth can outperform into mid-June, and even on minor pullbacks into late June, that July-September is likely to see Growth come back, led by Technology.
Average drawdown looks to be right in line with 20- and 60-year cycles
Interestingly enough, when looking back at the average mid-term election year intra-year drawdown, we see this comes out to 17% going back to 1950. The US stock market has fallen a bit more than that, but not by much and SPX barely hit 20% down before snapping back sharply over the last two weeks.
When delving a bit further in selecting specific years which might have a bit more harmony to 2022, such as 20-year and/or 40-year or 60-year cycles, we see that in 2002 and 1962, these both averaged 26-33%, which is 6-13% more than SPX, but largely in line with what the NASDAQ Composite has shown.
Overall, while the average stock has fallen much more than what the indices suggest, given AAPL and MSFT’s relative resilience helping broader indices hold up a bit better than expected given their high weightings, my feeling is this year’s correction is not out of the ordinary compared to most mid-term election year drawdowns.
