Discretionary leads the way on breakout to new weekly highs

Tuesday’s mild gains remain under key resistance, but breadth has definitely started to slow in the last couple weeks.  Following a close just above SPX-4124 on 4/3, the last 10 days have brought about only a 30-point SPX rally, or +0.70%.  While certainly positive, it lacks some of the upward thrust that’s going to be necessary to keep this rally going, given Technology having begun to stall a bit in recent weeks.

In the short run, however, the continued rally in Financials in recent days as earnings have gotten underway seems to be a definite positive for the big banks.  A pick-up in Regional banks would be a larger positive for the sector, in my view.

The standout early this week has centered on Consumer Discretionary, and Equal-weighted Discretionary has broken out to multi-month highs.  Casinos, Homebuilders, and Hotels all appear attractive technically, and should push higher in the days ahead.

Overall, following a 350-point S&P rally since the mid-March lows, or +9.2% in a bit more than five weeks’ time, the area near 4200 could prove challenging to immediately exceed given the lack of a catalyst with Earnings and an FOMC meeting in the weeks to come.

However, no evidence of any reversal is apparent at this time, and a bit of waning in breadth in and of itself is no reason to expect a stalling out barring the price reversal itself.  Price trends and momentum remain positively sloped with no evidence of any break in trends or negative price behavior to make one avoid the market.

Overall, my cycle composite warns of a possible turn lower into May, specifically between 4/27-5/20.  I’ll monitor price action and sector rotation to try to fine tune any trading exits for short-term traders who might care about near-term weakness into May.  However, at present, there remains precious little evidence from strictly a price standpoint to think markets are turning down.

As daily S&P 500 index charts show below, S&P has rallied over 9% since mid-March and now lies just fractionally underneath February peaks. 

Initial resistance lies near 4200 but the area of resistance caused by projecting former highs to higher levels along with last August peaks all come together near 4300-4325.  That’s thought to be the true area where, if exceeded, it would cause lots of short covering and the need to chase this rally by those who have sat on the sidelines.  It’s also an area which when surpassed will leave no doubt, in all likelihood, that the October 2022 lows were “the low” of the bear market.

On the downside, any daily close under 4069 arouses suspicion of a reversal playing out, with movement under 4039 being more definitive proof.  At present, it’s proper to wait until more evidence arises before thinking any kind of tactical pullback will occur.

Equal-weighted Discretionary breaking out– Casinos, Homebuilders and Hotels all favored

Early week strength out of Homebuilders, Casinos and Hotels has been impressive, along with a number of other travel-related (ex-Airlines) “Re-opening” names.

Equal-weighted Discretionary has just exceeded early April highs as of 4/18’s close, bringing this to the highest levels since early March.  This is a bullish development and Discretionary was one of only three major sectors which furthered gains to new multi-week highs Tuesday on an Equal-weighted basis. (The others being Financials and Materials.)

This has not yet been achieved with XLY 0.90%  given its big exposure to AMZN 3.36% , TSLA -1.10% , HD 0.94% , and NKE 0.19% .  Thus, the large-cap exposure to these large names which have underperformed has resulted in some degree of lagging by XLY 0.90%  compared to the Equal-weighted Consumer Discretionary ETF, (RCD), by Invesco.

Overall, this is a positive development for Discretionary, and I expect further near-term strength in RCD to 131-132 before any stalling out.

Homebuilders spike as Housing Starts exceed estimates

Homebuilders remain attractive technically and the ability of XHB (SPDR Series Trust Homebuilders ETF) to have pushed back up to new multi-week highs on better than anticipated Housing data, looks bullish.

Following a more than tripling of its price off the 2020 lows into late 2021, XHB started to weaken along with the broader market in early 2022.  However, prices managed to find strong support near the 50% retracement level of its former trough to peak rally.

This has remained a strong group within Consumer Discretionary since bottoming last June.

Stocks like PHM 2.19% , LEN 0.98%  and NVR -1.01%  are three of the top 15 names in YTD Performance within Consumer Discretionary’s ETF, XLY 0.90% . 

Overall, Builders look bullish technically and further strength looks possible to test early 2023 highs at $73, with movement above leading this up to the high $70’s and eventually to a complete retest of late 2021 peaks just over $86.

Technically, stocks like BLDR 1.30% , and PHM 2.19%  are technically among the strongest, having pushed back to new all-time highs.  Yet, others like TOL, and LEN 0.98%  (on UPTICKS) are also compelling and both have advanced to new weekly highs this week.

Natural Gas finally advancing to weekly highs

Natural Gas (NG) has finally shown some evidence of extending to new weekly highs after languishing sideways over the last couple weeks.

I had mentioned in my write-up in early April that Natural Gas could begin turning back higher, coinciding with oversold momentum, counter-trend exhaustion and bullish cycles.

The surge over the last three days looks to be signaling that this can now start to advance, and I expect a continued rally in NG, with initial targets up near $3.   Pullbacks, however, should be buyable given the improved momentum and technical structure of late. 

Only a move down under $2 on a close in front month NG Futures would postpone the rally again to allow for more consolidation.  Near-term, this looks to extend, and UNG is attractive to consider as an ETF based on Natural Gas.

Given Energy’s signs of having strengthened over the last month, many NG-related names, like LNG -0.14% , WMB, EQT 0.49%  and/or ENB -1.13%  might be considered.  Other names like DVN 0.19% , EOG 0.25% , COP 0.10%  and OXY -0.25%  also have exposure to Natural Gas, to name a few.