The near-term rally in global equities remains intact, and despite outperformance in much of Europe and Asia, SPX has been able to push higher and is on course for an early December test of 4110-20. Sector performance has reflected a strong defensive push since 11/15, while Technology has struggled to keep up lately, despite yields having not turned up aggressively. The NASDAQ has shown some negative divergence lately in remaining under early November highs, while the DJIA, as of 11/25, has pushed up to the highest levels since April. SPX hourly charts, as shown below, likely push up without much problem to test 4100 area next week. Any minor weakness should have firm support near 3980, and pullbacks should be used to buy in the short run.
QQQ weakness relative to SPX shows why a strong December rally might still face Headwinds
QQQ vs. SPX remains trending sharply lower, and performance data has certainly reflected that in recent weeks, with sectors like Utilities, Materials and Financials having trounced Technology over the rolling 5-day period.
However, even on a 1-month basis, we find former leading sectors like Technology very much in the middle of the pack, and Industrials, Materials, Financials, Discretionary, and Utilities have all outperformed Technology.
DeMark’s Symbolik software shows the relative relationship between QQQ and SPY below. Counter-trend indicators like TD Sequential and TD Combo which has been present to reflect relative lows in QQQ vs SPY in May of this year have now broken back under these levels as of the last month.
Furthermore, even on bounce attempts, the ratio has failed to recoup former lows in May and has turned back down in recent weeks. In order to find some evidence of QQQ bottoming relative to SPY, it’s likely that TD Sequential/TD Combo signals might have to materialize in this ratio.
My analysis shows this to likely take a minimum of 4-6 weeks, and looks premature at this time.
Thus, Technology is not the main source of leadership anymore for markets, and given technical signs that rates might require a move back to new monthly highs into 2023, it’s doubtful that Technology is going to regain leadership anytime in the next couple months.
This looks to be an important and potentially negative headwind for markets, as many of the other sectors have stepped in to “pick up the slack”. Yet, US Equity markets are pushing up at a slower pace than many other developed markets, this likely will be the case until early next year given Technology’s representation within SPX.
Equal-weighted Discretionary remains range-bound vs. Staples
One seasonal trend that happens nearly every year is the pick-up in Retailing stocks as holiday shopping and specifically Black Friday approaches. Afterwards typically reverses course once December gets underway.
While Retail makes up just a minor part of Consumer Discretionary, it’s important to watch how not only Retail performs within Discretionary, but also how Discretionary performs vs. Staples.
While SPX has gained more than 10% off the October 2022 lows, Discretionary has proven to be a mixed bag lately in its relationship vs Staples. Normally, “risk-on” rallies bring about outperformance out of Discretionary while the defensive groups like Staples lag performance.
As daily Symbolik charts of Equal-weighted Discretionary (RCD) vs Equal-weighted Staples (RHS) show below, the attempted lift in early November failed to break this consolidation.
Since November 15th, markets have shown pronounced outperformance out of Staples vs Discretionary, causing this ratio to fall. The last rolling 5-days of performance have seen Staples outperform Discretionary by more than 50 bps (Consumer Staples +2.32% vs RCD +1.77%)
This is one gauge to examine for evidence of defensive outperformance/underperformance. At present, Staples stocks like TAP 0.56% , STZ 0.28% , CAG -0.69% , MNST 0.49% , and GIS N/A% are all higher by more than 4% in the last week. Conversely, Discretionary names like DLTR 0.25% , KMX 0.49% , WYNN -1.25% , AMZN 0.80% and TSLA 4.30% are lower by more than 2%. Until Discretionary can decisively break out vs. Staples, this will continue to be seen as more of a defensive rally.
Utilities have also been gaining ground on Energy
Interestingly enough, while Energy has held up fairly well given the downturn in WTI Crude in recent months, Utilities look to be trying to bottom out vs Energy.
Daily Symbolik charts show Utilities having held former lows vs Energy in equal-weighted terms. Now both XLU and the Equal-weighted RYU are starting to gain ground and outperform in the last couple weeks.
TD Sequential and TD Combo indicators have confirmed “13 Countdown Buys” on weekly charts which argues for further outperformance out of Utilities vs Energy in the days/weeks ahead.
While this appears like a tactical 3-5 week type move, Utilities should be favored over Energy for the next few weeks until WTI Crude can show more evidence of bottoming. Thus far, this correction in Crude has lasted a bit longer than expected. However, it does still look to be temporary and likely should be complete into December.
Until Crude can definitively show more technical evidence of bottoming out, Utilities likely will show better near-term performance than Energy as a broad sector.
