Stocks should be near a trading bottom following a difficult couple weeks for the US Equity market. While Technology’s outperformance has disguised some of this recent selling pressure across multiple sectors, recent weakness hasn’t proven too extreme and should be nearing a low. US Treasuries and US Dollar both should be on the verge of turning down more sharply in the days/weeks ahead which might coincide with worse than expected economic data over the next couple weeks. However, until this begins in earnest, it’s difficult to make a compelling case that a broadening out in the equity rally is imminent. Overall, bullish June seasonality combined with a cyclical bottom following lack of material technical deterioration spells opportunity for US Equities in the month of June.
Interestingly enough, Friday’s SPX and QQQ performance failed to show the internal strength shown by many sectors following a worse than expected GDP print.
Eight sectors were positive in Thursday’s session, while just three finished lower. However, Technology was one of these three, and its outsized loss of -0.80% proved to be detrimental to performance in the major US Indices.
XLK 0.50% , the SPDR Sector Technology ETF, fell nearly double the amount of the Equal-weighted Technology ETF, RYT, and stocks like CRM -0.42% , NOW 0.65% , INTU 0.84% , ADBE 1.37% , and FI 1.53% all underperformed sharply as Software woes from Salesforce.com rippled across the Technology sector.
Importantly, the downward revision in the Core PCE Deflator combined with lower than expected GDP print helped Treasuries stage a sharp rally following a couple difficult weeks for Treasuries. Yields fell nearly 1% across much of the curve and many Equity sectors responded positively in Thursday’s session.
As can be seen below, RSP, the Equal-weighted S&P ETF, fell much more sharply than what was seen in SPX, or QQQ. However, it stabilized and traded positively during Thursday’s session, despite what seemed like an outsized day of losses for the US Equity market.
Overall, I feel like a triangle formation is underway on daily chart (Shown below), and RSP likely will not weaken materially further in the days to come. The combination of bullish June seasonality combined with a positive cyclical projection should result in a bottoming out and turn back higher for US equities in June.
S&P 500 Equal WeightETF
Software ETF (IGV) lies at a critical juncture following CRM woes
Software has been hit hard given weak revenue growth and disappointing guidance from Salesforce.com. Thursday’s report showed the slowest quarter for the company since it came public and Thursday’s 21%+ Stock drop proved to be the largest in at least a decade.
It’s been widely reported that software companies have been relatively slow to capitalize on the AI boom compared to Chipmakers which could be indicative of a weak IT Spending environment.
Technically speaking, the act of having broken down to the lowest levels since early January would seem to be negative, technically speaking.
However, the ongoing uptrend from 2022 intersects right near the important $77 level, making this a possible area of support.
The combination of the uptick in downside momentum given today’s open gap lower on heavy volume in IGV makes at least a minor break of $77 seem likely into next week.
However, any break of $77 wouldn’t find much support until near $73, which represents a strong level of Ichimoku and Fibonacci-based support.
Overall, I suspect that IGV might be close to trying to bottom into next week. However, the degree at which this bounce occurs into June will be key as to whether another “Down-leg” might be likely into July which is certainly possible given the degree of strong downside momentum on Thursday.
North American Tech-Software ETF
Software has broken down to new decade lows vs. XLK
As shown by the ratio of IGV, (Ishares Expanded Tech-Software ETF) vs. XLK, the SPDR S&P Technology ETF, this relationship continues to trade down sharply.
This past week’s underperformance in Software led the sub-sector to trade down to the lowest levels in more than a decade vs. Technology.
This has been trending down for roughly five years, but the support violation in 2022 resulted in outsized losses and/or underperformance for Software as a sub-sector.
Overall, this week’s break to new yearly lows in IGV vs XLK has two important takeaways:
- Software looks to still trend lower vs. XLK in the weeks and months ahead, making selectivity quite important among Software names.
- The AI-boom and “Magnificent 7” which dominates XLK has strengthened so dramatically that this ratio has deteriorated because of outsized strength in Large-cap Technology.
While I’m expecting that short-term lows in Software stocks likely are right around the corner in absolute terms, I’m skeptical that Software will outperform the broader Technology space and/or Semiconductors right away.
North American Tech Software ETF / S&P 500 Technology ETF Ratio
Consumer Discretionary has turned back up sharply vs. Consumer Staples after having reached support
While many investors recognize the degree of recent technical damage which has happened in the Homebuilding stocks along with some Retailers which have underperformed badly, the Consumer Discretionary sector now seems to be trying to stabilize in recent days.
Discretionary on an Equal-weighted basis has proven to be the “least worst” of any of the 11 ETF’s that represent the S&P 500 in the past week in data through 5/30/24. RSPD returned -1.16%, which far surpassed the -2.59% return of the Equal-weighted S&P 500.
RSPD also came close to outperforming the SPX, the latter which was down just -0.75% for the week, as Technology helped to weather losses in the SPX.
As this ratio below shows of RSPD vs. RSPS (Consumer Discretionary vs. Consumer Staples). this ratio turned back up sharply this past week to multi-week highs with one day left in the trading week. Many investors consider this ratio to be key towards analyzing the degree of “risk-on” trading, vs. “risk-off” when it turns down sharply. (A turn lower indicates that Staples has begun to outperform Discretionary and normally happens coinciding with stock indices moving lower.)
The intermediate-term uptrend between Discretionary and Staples has been intact for over two years thus far. Despite some minor wobbling in recent months, Discretionary has not broken down vs. Staples.
This past week has brought about a strengthening in this ratio back to multi-week highs, which is seen as a positive for the “risk-on” trade, despite the broader market having wobbled a bit.
Overall, I see Discretionary breaking back out to new highs for 2024 in the weeks to come. The upside target for this ratio lies near 2021 peaks and might happen as further evidence builds of a broader stock market rally.
S&P 500 Equal Weight Discretionary ETF / S&P 500 Equal Weight Staples ETFRatio
