For those who missed it, you can view my CNBC appearance this morning (5/10) by clicking HERE
Equities have extended gains and have now come within striking distance of late March peaks. SPX has nearly recaptured all of the period of weakness from late March into April, and likely will test and break out above resistance as US Dollar and US Treasury yields start to weaken. The uptick in Financials, Materials, and Industrials are constructive factors towards helping the market begin to show more broad-based strength. Additionally, 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 little resistance ahead of late March highs at 5264.85 and eventually can exceed this as the rally grows stronger into June with targets near 5400.
In summary, this week has gone a long way towards suggesting that our recent drawdown from late March has run its course. The selloff spanned just three-weeks total in duration, and the snapback in many sectors has made it technically likely that SPX and QQQ will test and exceed recent peaks made two months ago.
Daily momentum gauges are upward sloping and not overbought, while short-term breadth has recovered after dipping to near oversold levels in mid-April. As has been discussed, intermediate-term breadth gauges have held up quite well and have given confidence that a broad-based rally remains a favorable theme for 2024.
Sentiment did manage to rise a bit on the recovery over the last two weeks on both a retail and institutional level. Yet, several factors remain promising towards suggesting that a healthy bearish view might be still lingering (which from a contrarian standpoint, is bullish for Equities).
Specifically, CFTC Positioning as of Tuesday 5/7/24’s close (Commodity Futures Trading Commission’s Commitments of Traders report) showed heavy Selling of S&P E-mini futures (53k) compared to the prior week.
Additionally, Hedge Fund Research’s (HFR) positioning data now shows aggregate stock market positioning to be short. (By utilizing the beta of HFR’s Macro/CTA index to the SPX, it’s possible to get a rough view of how hedge funds are positioned). When stock indices rally following positioning having turned negative (Short on direction), it raises the probability of short-covering for those who find themselves “offsides” which could exacerbate rallies.
Despite Technology not dominating performance as most investors are accustomed to, US Equity indices have been able to carry higher just fine. Moreover, the traditional seasonal pullback in early May seems to have been aborted as US Equities push higher into mid-May.
SPX still headed towards late March highs
S&P 500 Index
As shown above, Equities have ignored the recent poor economic data as the downward pressure on interest rates (despite massive supply this past week) has proven to be positive for Equities. (Bad News, in the short run, has been good news for Stocks.)
While next week’s CPI could very well prove important as to the course for interest rates, it’s thought that pullbacks, if and when they occur, should prove short-lived and buyable by May expiration. Short-term cycles for both Cryptocurrencies and Equities show a low to be in place by 5/20-24th. (Thus any pullback likely wouldn’t prove long-lasting, and likely bottoms before reversing to push higher into mid-June.)
Overall, my bullish thesis is unchanged. I am expecting a push higher to challenge March 2024 peaks next week. If this level were to prove to be challenging for SPX to immediately get above, (given some evidence of stalling out) then minor consolidation might happen post CPI data. At present, nothing in the price, nor momentum or DeMark exhaustion signals suggests that such a move could be imminent.
Consumer Discretionary weakness has resulted in sharp two-month underperformance; Yet now RSPD is nearing support
Interestingly enough, US markets have shown persistent underperformance in many Discretionary stocks over the past couple months, and names like LVS -1.33% , ULTA, SBUX -0.48% , LKQ 1.18% , CZR -0.87% , and NCLS have all fallen greater than 10% in the rolling one-month period through 5/10/24.
As can be seen below, ratios of Consumer Discretionary vs. S&P 500 (both in equal-weighted form) have largely struggled since last Summer after having peaked out last July.
Despite the year-end rally, Discretionary has fallen sharply since mid-March. Yet, RCD vs. RSP 0.44% now looks to be nearing support near prior lows.
I feel that last Fall’s lows should hold on this retest (which is the prior low on this ratio chart which this relative relationship of RSPD to RSP is nearing).
Thus, Consumer Discretionary likely could bottom out next week in relative terms. Yet, it’s difficult to embrace this sector as an overweight, and outside of stellar performers like CMG -0.89% , GRMN 0.24% , PHM -1.63% , TSCO, DECK -0.60% , DPZ -2.52% , and AMZN 1.41% , one needs to be extremely selective.
Bottom line, this sector has disappointed in recent months. However, barring a larger breakdown, I’m uncertain that we’ll see much further selling as Equal-weighted Discretionary vs. Equal-weighted S&P 500 nears important former lows from last Fall.
Equal-Weight Discretionary ETF / Equal-Weight S&P 500ETF
Consumer Discretionary vs. Consumer Staples still trending higher since late 2022, despite recent underperformance
One common way of studying the degree of defensiveness in the market is to look at ratios of Consumer Discretionary (RCD) vs. Consumer Staples (RHS) (utilizing Equal-weighted ratios of each sector’s ETF’s by Invesco).
As can be seen below, despite the recent lagging tendency in Discretionary, this sector remains sloping higher vs. Staples and has made no material breakdown.
Given the combination of this chart below along with the prior chart of Discretionary vs. SPX nearing support, I’m confident that this recent underperformance might prove temporary before an above-average bounce into late Q2.
I favor overweighting Discretionary vs. Staples over the next three months into August, and expect a snapback in many Consumer stocks in general as rates start to decline.
Equal-Weight Discretionary ETF / Equal-Weight StaplesETF
Performance data tells an important story
Energy is close to losing its lead as Year-to-Date (YTD) performer, as Utilities outperformance last month has drawn this very near. However, as I explained last night, I don’t view this as the start of Defensive trading given the overall poor performance out of Consumer Staples and REITS.
Technology’s lagging has put this sector right in the middle of the pack, and it remains very much mid-Range, which might come as a surprise given how phenomenal many of the “Magnificent 7” charts look on many different timeframes.
Financials, Materials, Industrials, Utilities and Energy are the five outperforming sectors on a YTD basis.
Utilities, Materials and Industrials were the three sectors which showed better than 3% gains over the last week.
Overall, it’s thought that a rapid pullback in interest rates likely should serve as the catalyst for Technology to make a comeback. Moreover, recent evidence of stocks like BIIB -1.27% bottoming out along with the broader Biotechnology space should be good for the Healthcare sector.
Bottom line, given that more than 70% of all SPX names are currently above their respective 200-day moving average, I view the strong performance in sectors like Financials and Industrials to be a real positive. Sectors like Materials, and Utilities don’t carry much weight, but are certainly very strong and look to continue being strong in the weeks to come.
Equal-Weight S&P 500 Sector ETF Performance Table
