Top areas to expect mean reversion as Dollar & Rates fall

Equities have extended gains and remain in a new short-term bullish uptrends as part of intermediate-term uptrends which never wavered during the recent three-week decline.  While more evidence of falling Yields and US Dollar likely beginning in the days/weeks ahead, it’s likely that the recent uptick in Healthcare, Financials and Industrials are constructive factors for this market technically and should help it broaden out.  Moreover, Small and Mid-cap styles have come back to life over the last week and this recovery is also important despite it being in its infancy.  Overall, I expect that SPX has begun its trek back to late March highs at 5264.85 and should exceed this En-route to 5400.

US Equities are starting to look much more appealing again on a broad-based nature given the comeback of several former groups which had been hard hit during the selloff this past March.

For instance:

–Semiconductors, for one, have achieved a recent breakout and look to be the best part of Technology.

–Transportation stocks have erased the breakdown into late April and May has produced a better than average bounce back in the DJ Transportation Average to reclaim the area of the former breakdown.

–Emerging markets (“EM”) have come to life as China began to “re-awaken” back in February.  The recent breakout in the Emerging markets iShares MSCI ETF (EEM 0.44% ) is noteworthy and bullish for EM.

–Biotechnology has begun to slowly but surely lift off 52-week lows, and several prominent names like BIIB 0.23% , and MRNA 0.17%  have begun to bottom out following a dismal six months.  XBI has exceeded a multi-month downtrend and looks much better technically than a few months ago. 

–Solar stocks are gradually starting to stabilize after a very difficult 2023.  The uptick in this group is thought to be particularly related to the beginning of yields rolling over.

–Homebuilding names have also begun to stabilize after a tough few months which saw many stocks underperform as interest rates lifted on the long end.  The recent pullback in rates could kick off a larger rally in the Builders.

-Finally, Small caps have certainly begun to show some much better relative strength after a difficult start to 2024.  While two weeks of outperformance is insufficient to surpass the multi-year downtrend in place on relative charts of Small-caps vs. Large, it’s a step in the right direction and should strengthen further as rates start to come down further into this Summer.

Overall, all these groups have technical appeal for a “catch-up” trade over the next 3-5 months.  One should continue to watch the trajectory of long-term interest rates and the US Dollar for clues of a more sustainable decline.

Given that S&P 500 remains pointed higher but failed to show much meaningful upside acceleration and/or trend reversal worth commenting on, the following four charts will highlight some of these aforementioned areas of potential outperformance, starting with EM.

Emerging Markets have begun their sharp snapback

Many parts of Emerging markets look quite attractive, but I’m particularly focusing on some of the former laggards which are now starting to come back to life.

China remains a near-term outperformer, while other areas like South Korea and Taiwan have also begun to show relative strength.

Moreover, the entire LatAm trade has begun to come back to life which I find quite compelling at current levels for a 3-5 month investment (or longer).  Brazil, and its iShares MSCI Brazil ETF (EWZ 0.22% ) is arguably breaking out of the entire downtrend since December 2023.

Meanwhile India’s INDA 0.64%  now displays weekly DeMark-related exhaustion signals which might result in some underperformance in India following a push back to new all-time highs while laggards like Brazil play “Catch-up”.

Overall, the breakout in EEM 0.44%  back over $42 is a very constructive technical move which has exceeded the former area of trendline resistance connecting the last few important swing highs.

I expect a push up to $46 initially which represents a 50% retracement level of the entire decline from 2021 into late 2022.  Thereafter, gains to $48.75 might be possible which is found near a Fibonacci-related 61.8% retracement level of the same former decline.

Biotechnology’s XBI finally looks attractive as Small-caps begin to show some signs of awakening

The combination of Healthcare stabilizing and trying to turn higher along with interest rates starting to ease on the long end appears to be a bullish combination for Healthcare ETF’s like XBI, the SPDR S&P Biotech ETF.

As many know XBI is predominantly concentrated in Small and micro-cap stocks, but looks appealing now following a minor breakout of the downtrend since March.

As shown below, the breakout to multi-year highs this past February initially proved false before a sharp correction into April.  However, the rebound in the last few weeks has been impressive technically and has happened as interest rates have begun to ease.

Given my expectations of Healthcare outperforming in the months ahead along with Treasury yields retreating, XBI looks like an excellent technical mean reversion candidate.

Gains back up to $103 look likely while movement above would set in motion an intermediate-term rally up to $118.  Bottom line, this looks appealing as a formerly hard-hit area within Healthcare which has started to re-awaken.

Solar stocks are likely to bounce in the months ahead as rates fall

One of the more interesting, but not surprising negative correlations in recent months has been the underperformance in Solar stocks as interest rates have risen.

Now that rates have begun to retreat given a few economic reports not exceeding expectations, this group has begun to show some interesting strength off of its 52-week lows.

TAN the Invesco Solar ETF, has recouped the former lows from February 2024 and last November 2023, which had been broken on the decline into April.  (That was the first evidence of a potential bottoming.)

Now, TAN has pushed up to arguably exceed the entire downtrend from early 2024.  This is also interesting and makes this group one to consider as more evidence of a Treasury rally becomes more evident.   (I had discussed in recent reports that a TNX break below 3.35% would be meaningful and allow for a decline under 4.00%.)

While attempting to invest in something like TAN which has just begun to lift off 52-week lows might seem appealing, rallies in groups such as these which have been quite weak on an intermediate-term basis normally require a lot of patience. 

Overall, a push up to the high $40’s in TAN looks likely in the short run.  Thereafter, one can make the technical case for an eventual rally back to test late December 2023 peaks in the mid-$50’s.

I believe stocks like SEDG -4.00%  and ENPH -2.17%  at present are inferior to names like First Solar (FSLR 1.53% ) which is my preferred technical favorite of the larger more liquid names within TAN.

Building and Construction names are likely to rebound following their recent three-week decline

One of my favorite areas for investment for the months ahead remains the Homebuilders, a group which I mentioned in my 2024 Technical Outlook back in January 2024.

While this group did suffer following the push higher in rates in the back half of March into April, the monthly charts suffered little to no technical damage.

Furthermore, the start of rates turning back lower should aid this group and help many of the Homebuilding names work their way back to all-time highs.

While short-term momentum gauges did roll over to negative territory on the recent consolidation, the longer-term monthly MACD remains quite positive for ITB 0.00% , the Ishares US Home Construction ETF (Very similar to XHB in technical structure).

Overall, attempting to buy dips in former leading groups like Homebuilders can often be technically more appealing than trying to own a formerly downtrodden group which is emerging from 52-week lows.

In this case, despite the underperformance in Building names since March, this is one of the better intermediate-term sub-sectors within Consumer Discretionary.

I favor ITB pushing back to new highs and expect a lift to $125-$130 between now and August.