Has “FANG” peaked out?  Don’t bet on it, but Small-caps could lead

Trend bullish – Expect recent consolidation is nearly complete & SPX begins to push back higher post Wednesday’s CPI print

The minor stalling out in US benchmark indices doesn’t appear that bearish as little to no real deterioration has occurred.  However, this churning has been helpful in some regards, as US indices like the NASDAQ are less overbought than three weeks ago.  Furthermore, this consolidation has prevented sentiment from ratcheting up to more exuberant levels.

Overall, I view this minor pullback as being healthy, technically speaking.  Prices are largely right near closing levels from a month ago, back on 6/15, and haven’t undercut prior weekly lows, nor violated uptrend line support.

The minor slowdown in Technology hasn’t been too damaging to this sector, but rather has allowed sectors like Discretionary and Industrials to “pick up the slack”.  Moreover, Healthcare should be kicking into gear this week for what could be a very favorable time for SPX’s 2^nd largest sector by market capitalization.

As discussed last week, the rotation into Small-caps and Transports looks promising in my view technically.  Furthermore, the rolling over in the US Dollar on initial signs of labor market weakness could likely provide a tailwind for Equities, and this could be joined by a steeper pullback in Treasury yields following Wednesday’s economic data.

The weekly SPX chart shows why it remains correct to be optimistic technically speaking, as uptrends remain very much intact.  Additionally, the last few weeks of churning really haven’t resulted in any damage, and weekly momentum remains positively sloped.

Counter-trend evidence of upside exhaustion has not occurred and will take at least another 2-3 weeks of gains at a minimum.

Overall, I agree wholeheartedly with Tom Lee that markets should have an upward bias which likely lasts at least into July expiration.  

Downside support at late June lows of SPX-4328 should not be undercut technically.  Rather, weakness should be close to completion and lead an upcoming rally back to at least 4500.

As discussed last week, if we begin to see more evidence of optimism/complacency, coupled with counter-trend exhaustion and/or Defensive positioning into late July, that might bring about the first possibility of a potential short-term top. 

At present, this consolidation looks bullish and makes US Equities appear like a good risk/reward for higher prices in the weeks ahead.

“FANG” looks early to peak out

The Large-cap Technology stocks included in Bloomberg’s NY FANG index remain trending higher despite some minor consolidation of late.

Many investors have noticed that this group has not performed as well over the last month compared to other sectors like Industrials and Consumer Discretionary. 

January of 2022 and 2023 both provided actionable signals on this dominant area within Technology, with 2022 providing a large bearish trendline breakdown (“Sell”) while January 2023 provided the trendline breakout (“Buy”)

While the May-June rally caused “FANG” to become a bit stretched from its uptrend from late 2022, this hasn’t signaled any reason to want to avoid this area within Technology.

My own technical analysis on both AAPL -0.41%  along with MSFT 1.80%  and NFLX -0.63%  suggests these remain quite healthy technically and all should push back to new all-time highs.

GOOGL has been undergoing a mild consolidation, but likely finds strong support near $113-$114 before pushing back higher.  AMZN 3.36%  and META 0.27%  are a bit stretched near-term;  However, no credible evidence of any trend deterioration has occurred which would make avoiding these names prudent.

Overall, “My FANG index” shown below is comprised of AAPL -0.41% , AMZN 3.36% , NVDA 6.25% , META 0.27% , TSLA -1.10% , AMD 2.41% , NFLX -0.63% , MSFT 1.80% , GOOGL 10.17% , and SNOW.

Both on an absolute basis, along with relative to SPX, the Large-cap Technology area represented by “FANG” remains quite attractive, and should gain further ground on the upside into late July.  Until/unless these uptrend lines start to face more challenges, minor consolidation (like what’s happened over the past week) makes this area more attractive.

Small-caps vs QQQ has triggered DeMark-related buy signals

I discussed last week that the ratio of Small-caps to Large ( IWM 1.04% , the Ishares Russell 2000 index ETF, vs. SPY, the S&P 500 SPDR ETF) had formed a DeMark related buy signal (based on 13 Countdown exhaustion ) that could lead Small-caps to outperform SPX.

It should be noted that IWM shows this same exhaustion signal on weekly charts vs. QQQ (Invesco QQQ Trust) as well as vs. MDY (SPDR Midcap Trust Series 1)

This strength in Small-caps over the last week showed outperformance also on Monday (7/10) vs. SPY and QQQ and MDY and should lead IWM to show better relative strength vs. QQQ in the weeks to come.

Thus, while QQQ does not appear to be topping out (and still looks strong on an absolute basis and relative to SPX) it appears like Small-caps (and in particular, IWM) might be a better bet for the weeks to come.

I expect IWM to exceed June peaks of $189.24 en route to 197.50-200 in the weeks to come.

Thus, Small-caps should be overweighted.

AAII Bears level has not reached extreme low levels

AAII sentiment has not yet gotten to levels which typically mark most corrections.

While many rightly point out that AAII Bullish sentiment has reached the highest levels since late 2021, the spread between Bulls to Bears has not yet grown to extreme levels (As I personally define as 30% or greater Bulls over Bears)

Furthermore, the percentage of Bears has not yet dropped under 20%.   As shown in this chart below, the 10-week moving average of AAII Bears lies at 32.91.    This is nowhere near the prior lows seen from 2018-2021 when US Stocks made short-term peaks.

Overall, I don’t buy the thinking that market participants are bullish.  This poll, combined with Equity put/call ratio information, Investors intelligence polls coupled with my own conversations with institutional and retail investors, keeps me convinced that many are still not participating in this market rally to the extent they could be.

As discussed last week, claiming that markets are “overbought” or that US stock performance has witnessed selective participation only by the top 5 names does not make a compelling argument that investors are bullish.  These are typically arguments by those who are not positioned as bullish as they could be.