Trend has improved with Wednesday’s breakout; Expecting SPX rally above 4200 is underway with Wednesday’s gains
Wednesday’s range breakout seems to be occurring directly on signs of the Debt ceiling negotiation showing progress in recent days. While no official agreement is yet in place, both parties seem intent on reaching a deal in the days to come.
7 of 11 sectors finished higher than 1% on the day in Equal-weighted terms; However, it was the rebound in both Regional banks and Technology that stood out as most important following recent selling pressure.
Consumer Discretionary trends vs. Consumer Staples have broken out and are starting to turn higher both on a Cap-weighted and also Equal-weighted basis.
NIKKEI exceeded 30k for the first time in over two years. Meanwhile, appetite for Chinese equities seems to be losing enthusiasm given the lack of any meaningful catalysts or inflows. However, Chinese Growth seems to be advancing vs. Value for the first time in nearly two months given Technology gains.
Overall, the mid-May cycle in SPX which was thought to start between 5/17 and 5/24 very well could have kicked off a meaningful rally on Wednesday given the widespread evidence of breakouts among numerous sectors. (A cycle turn does not necessarily have to be a high; This very well could play out as stocks turning up sharply to break the recent consolidation, pushing higher into June.
While QQQ has gotten stretched, and has signaled the completion of exhaustion signals per DeMark, it seems wise to wait for evidence of some stalling out, vs. just selling into gains that are hitting new monthly highs. Ratios of both SPY and DIA vs. QQQ look close to trying to stabilize and turn higher. Thus, there stands a chance that Financials, Discretionary, and Healthcare might pick up the slack a bit vs. Technology, which still looks to have work to do.
Below is the chart of SPX at mid-day Wednesday ahead of the breakout. Our recent discussion on sector rotation tilted the odds towards an upside breakout, and I suspect this likely happened Wednesday. Barring a move back under 4100, this should lead prices to challenge and exceed 4200 a bit more quickly than was possible given our recent seven day range of <1% swings.
Banks rise most in two years as Regionals bounce on schedule
This KRE -0.76% surge looks quite positive and has thankfully arrived on schedule following recent evidence of counter-trend exhaustion per DeMark indicators on daily and weekly charts showing exhaustion.
KRE rose to the highest levels since 5/1 on a closing basis, exceeding the highs of the last eight days.
Initial resistance should materialize near $40.70, but over that level should help drive a rally up to near $42.
Overall, Financials look to be a sector that can show some near-term outperformance after recent selling pressure into March lows. However, this rally looks tactical in nature and likely isn’t the start of an intermediate-term rally in the Banks.
Within Financials, I expect Regional Banks to show better strength than either Money Center Banks, or Broker Dealer stocks in the short run after having underperformed for months.
Consumer Discretionary has broken out again vs. Consumer Staples
Over the last week, I discussed that both Consumer Staples and Utilities had rallied up to key resistance and might stall out and/or reverse course.
This week’s rotation out of Defensives looks important and negative for Defensive issues, while appearing bullish for risk assets
Ratio charts of Consumer Discretionary has officially broken back out vs. Consumer Staples on both a cap-weighted basis when viewing XLY 1.04% vs. XLP 0.15% as well as on an Equal-weighted basis (RCD vs. RHS)
This looks like an encouraging sign for risk assets to gain ground at a time when markets had neared a possible turning point based on various cycles.
Given that US Equities had grinded sideways over the last six weeks, it’s my view that Wednesday’s breakout likely could serve as the catalyst for a push higher in the days/weeks ahead as the market seems to be sniffing out a debt ceiling deal ahead of the agreement itself
Crude Oil’s rally likely spurs on a rally for Energy over the next few weeks
Energy had proved to be a relative underperformer in recent months after a strong 2022. Wednesday’s minor downtrend line breakout likely will serve in Crude pushing higher, and this should positively affect Energy ETF’s like XLE 0.59% , OIH 1.52% and XOP 0.56% .
The initial area to watch looks to be $73.89, but over this level should lead up to $76 and eventually up to $79 which looks to be a meaningful area of upside resistance.
Only a move back over $83.50 in front month futures would allow for a larger intermediate-term rally. At present, this bounce looks tactical only. However, it should positively help Energy rally after a dismal month of April.
Resistance for OIH 1.52% lies at 266-70, and XOP resistance lies at $126, then $128.
