Equity trend bullish but one can’t rule out some temporary consolidation into next week after this push back to new high territory as QQQ, SPX consolidate gains before rallying further. Yields and the US Dollar have pulled back to near uptrend line support and require larger weakness to expect immediate downside acceleration. Overall, short-term trends remain bullish, and momentum and breadth are supportive of further gains into June. Whether or not investors choose to hold out for possible consolidation here is a tough choice but I suspect that any weakness proves temporary and will still result in gains into mid-June. It’s right to be bullish, and consolidation would make SPX more attractive for further gains up to 5400.
US Equity markets look to be stalling out following this week’s push back to new highs. While I sense it’s right to be bullish for a rise into June expiration, there very well could be some consolidation in the short run.
This might take the form of a choppier tape than what’s been seen in recent weeks, and sector rotation out of Industrials and Discretionary has been important and negative this week towards signaling that these sectors in particular might require a bit more consolidation before gains can continue.
Overall, I do not favor exiting long positions, but I suspect that some backing and filling might be necessary before the rally to SPX-5400 gets underway.
As shown below, the decline in TNX down to 4.35% looks important, and might result in a minor bounce attempt over the next 3-5 days (or slightly longer) before a pullback under 4.35% occurs on a weekly close.
US 10Y Yield ETF
I listed several reasons in yesterday’s note from 5/15 as to why a minor stallout was possible. However, the key reason seems to involve Treasury yields having fallen to important near-term support. (See chart above.) Here are those reasons from last night’s report, and I’ve added a fourth reason.
I suspect a stalling out/minor consolidation could happen based on the following reasons:
- TNX is now down to support at 4.35%. Its decline was a chief catalyst for the recent upswing in Equity indices. While I expect a big decline in Treasury yields down to test and break last December’s yield lows under 4%, there hasn’t yet been a breakdown of the existing uptrend.
- QQQ now shows DeMark-based exhaustion (TD Sell Setups on a daily and also 240-minute basis) on Wednesday’s breakout. (Nine consecutive daily closes where each close is above the close from four trading days ago.) While these don’t often constitute sell signals of any magnitude on daily charts, they can be important in allowing for a strong move to “take a breather” before the move continues.
- Equal-weighted S&P 500 along with DJIA, Russell 2000, and DJ Transportation Avg. have not yet broken out. These might take more time but the negative divergence (some Equity indices hit new highs, while others don’t) normally can suggest some backing and filling before the rally can continue.
- Industrials along with Consumer Discretionary have been weak lately and this rotation might continue a bit longer.
Industrials have rolled over to multi-week lows vs. S&P 500
While I remain Overweight the Industrials sector, I believe this week’s decline to multi-week lows could bring about some near-term consolidation in this sector which should prove buyable into late May.
Overall, there has been some degree of mean reversion lately where some of the top performing stocks in the past month, like AAL, HON, MMM and UAL were all prior underperforming issues.
Furthermore, recent laggards within XLI (Sector SPDR Industrials ETF) have seen PCAR, UBER, ODFL, JBHT, and BLDR lose ground.
These latter are all very good intermediate-term technical longs. However, most became overbought into March and now look to be simply alleviating those stretched conditions with some minor consolidation.
Bottom line, this minor underperformance of late doesn’t appear serious, nor to be something which has much longevity for the Industrial sector. I consider all the recent laggards I’ve listed above to be appealing intermediate-term technical longs. Any further drop into next week for Industrials in relative terms might prove to be a very attractive time to consider buying this group for a push back to highs.
However, this decline to multi-week lows in Industrials vs. SPX looks to be something which might continue in the short-run.
Equal Weight Industrials ETF / Equal Weight S&P 500 ETF
The Consumer Staples sector remains a laggard to both REITS and Utilities
Given the recent strength out of Utilities and REITS, some have claimed that Defensive strength is coming back.
However, when eyeing Consumer Staples, this sector continues to trade poorly and underperform the SPX.
Outside of some prominent mean reversion names like HSY, or WBA in recent weeks, it’s been difficult to embrace this group technically and selectivity remains important.
When eyeing the Equal-weighted Consumer Staples ETF (RHS) vs. S&P 500 also in Equal-weighted form, one sees that Staples has had a difficult time trying to stabilize and work its way higher, relative to RSP.
Year-to-date performance for the Sector SPDR ETF, XLP is 7.32% year-to-date through 5/15/24. Yet, when taking out the large-cap influence, the Equal-weighted performance of RHS is just +2.88% during this same timeframe, which has underperformed XLP by nearly 500 basis points.
Overall, while it’s right to embrace stocks like WMT and COST, CL, STZ, or TSN, it’s wrong to think that Staples has begun to show any sort of strength which would signal a return to defensiveness in the market.
I still view Consumer Staples as an Underweight, technically, and more is needed before expecting this sector is starting to show more relative strength.
Equal Weight Staples ETF / Equal Weight S&P 500ETF
Crude might bounce into June; However, lots of damage has been done given its April decline
Technically I believe that Energy’s recent underperformance likely should reverse given the recent stabilization in WTI Crude oil in recent weeks.
A rally looks likely which might retrace 50-62% of the recent damage in WTI Crude since early April.
Such a move would be bullish for Energy as a sector (in all likelihood) and should help Energy start to turn back higher following its one-month underperformance.
Energy was actually the only major S&P 500 ETF (out of 11) which experienced negative performance in the rolling 1-month period ending 5/15/24, with returns of -1.39% through 5/15/24 for XLE and an even worse -1.74% for RYE, the Equal-weighted Energy ETF by Invesco.
However, I can’t help but harbor some doubts on the ability of WTI Crude to immediately rise back over peaks from early April, and weekly momentum, as per MACD, has turned negative given a bearish crossover of the signal line.
My cycle composite also shows a far more negative trajectory for WTI Crude in the back half of 2024 vs. the 1st half.
Finally, the Elliott-wave pattern from April seems to show just a three-wave decline from the peaks. This might mean that a bounce could occur into June before any additional period of weakness for WTI Crude. (If the Elliott pattern were to take the form of a Double Zig-Zag formation vs. a move back to new high territory.)
Bottom line, I still advocate keeping Energy as an Overweight at this time. However, much depends on the ability of Crude and Energy as a sector to rally sharply from here into June. Failure to make sufficient progress higher would be considered a technical negative, and I would likely be forced to drop Energy to a Neutral rating.
At present, today’s close in WTI Crude at multi-day highs likely could mean this stabilization of the last couple weeks is giving way to a rally back to the mid-$80’s for Crude.
WTI Crude Oil Futures
