Growth, FAANG holding up as washout nears capitulation
Key Takeaways
- SPX about-face has taken prices to right above key intermediate-term support
- FAANG stocks like AMZN, NFLX, MSFT, AAPL have begun to outperform
- Growth has held up over May lows vs. Value and has shown better relative strength
The immediate about-face into Thursday has now brought prices down to within striking distance of very prominent technical targets in price for SPX, QQQ and DJIA. Meanwhile, many time-related indicators suggest markets should be growing very close to trading lows, as early as next week. Evidence of bearishness turning to capitulation has been growing, and I’m confident that markets are nearing a bottoming process which should be in place by the end of June. Cycles, counter-trend exhaustion tools, and very bearish sentiment are all coming together, suggesting markets can make a low in the near future, despite evidence of downward earnings revisions starting to just begin to ramp up. Overall, while my base case target of 3815 failed to hold this past week, there exists even stronger support near the 50% retracement of the 3/20-1/22 rally, which intersects 3505 and lies right near former February 2020 peaks. Bottom line, prices look to be 3-5% from meaningful support. While a choppy period over the next month might need to happen before a larger rally can happen, it looks right to position long into end of month, and initial lows could be in place by next Friday. Look to buy dips at 3505-3650.
Growth starting to hold up better than Value
While SPX, NASDAQ and DJIA have all pulled back to hit new multi-month lows, the ratio in the Ishares Growth ETF (IVW-0.59% ) vs. the Ishares Value ETF (IVE0.19% ) has held up above May lows, resulting in positive divergence.
This looks to be the first sign of Growth starting to hold up better than Value while the stock market continues lower since last November.
I attribute this to two factors: First, the relative outperformance of Large-cap Technology during the most recent pullback this past week looks important. Second, Energy has started to consolidate after its very steep run-up. Overall, I expect Growth starts to outperform Value as Technology makes a comeback in the months to come, and it should be right to expect some mean reversion after this recent weakness.
FAANG has begun to trade relatively better, and that’s worth paying attention to
In the last week, we’ve seen AAPL, AMZN, GOOGL, MSFT, and NFLX all lose 3-6%. However, SPX and NASDAQ are lower by 9-10%, showing that many of the high growth Technology and Discretionary stocks that make up the NY FANG index have performed much better.
Given the influence of these companies’ stocks within many of the leading indices and ETF’s, along with their weighting within Technology, this looks to be an important development that many are overlooking given the market’s severe downside volatility in recent days.
Breaks of the relative downtrend vs. the SPX should constitute the first signs of the market trying to bottom, despite Technology’s poor performance this past week. It’s thought that all these stocks likely are close to intermediate-term lows, and should start to turn up in Q3 as yields and US Dollar start to peak out and turn down.
Breadth is getting down to “So bad, it’s good” levels
Interestingly enough, the percentage of SPX issues above their respective 50-day moving averages (m.a.) has now hit 5.5%, the lowest level since 2020. Moreover, the percentage of SPX issues above their 200-day moving averages has dropped down to 15% as of 6/15/22 close, which also is the lowest since spring 2020.
The deterioration in Consumer and Energy names has fallen to play catch-up with Technology lately, and even Industries like Utilities and REITS have been hard hit.
Overall, the thinking is that the selloff has become so broad-based lately, and has demonstrated so much recent weakness, that few if any sectors have been spared from weakness. This is a necessary part of the process towards thinking a meaningful trading low is near. Given that only 5% of issues are above their 50-day m.a., there aren’t many issues which remain overbought, which could join in the weakness at this point by turning lower, as most stocks already have.
Bottom line, this is a key point to showing that markets are truly getting oversold, regardless of whether weekly RSI has reached former lows seen in 2020.
