S&P and QQQ are now back to new all-time highs quickly as US Treasury yields have begun their descent. This won’t prove to be a straight shot for either asset class in my view, as the broader market has not yet begun to participate, and some signs of negative momentum divergence remain present. However, a stair-stepping rally makes sense for Equities as Treasuries seem to have shown their hand this week, and June seasonality in Election years remains positive. Overall, a bullish stance remains correct, but with close eyes on other sectors starting to kick into gear in the weeks to come.
Many are wondering what’s needed to help the broader market play Catch-up with the recent surge in Technology, as this week’s breakdown thus far hasn’t materially helped the Small-cap or Mid-cap sector, nor the Financials sector which has huge implications within SPX as the second largest sector.
Bloomberg and other news sources are claiming that the gap between Equal-weighted S&P 500 (RSP 0.11% ) and cap-weighted S&P 500 (^SPX 0.16% ) might be due to converge given the bullish earnings outlook in sectors outside Technology.
While I can’t speak to whether a pick-up in earnings would serve as the catalyst for some outperformance in broader market (as the correlation between earnings and stocks remains dubious) the charts remain inconclusive that broader market strength is imminent.
As seen below, the recent plunge down to new yearly lows in relative charts of RSP to SPX makes it still appear a bit premature that Equal-weighted S&P 500 should start to outperform the SPX right away.
S&P 500 Equal-Weight ETF / S&P 500 (Cap-Weight) ETF (Weekly)
Monthly charts of Equal-weighted SPX to S&P 500 also look early to bottom
When looking at monthly charts, the downward trend looks even stronger, and doesn’t have immediate former lows which might serve as support, nor exhaustion counts approaching (per DeMark) that would signal a possible upcoming trend reversal.
TD Combo counts are on a 9 count between RSP and SPY which normally could bottom out on a 13 count. Thus, four more months would be necessary (specifically using this methodology) before anticipating a potential low in this relationship.
While this certainly isn’t required before some mean reversion gets underway, it did prove to be quite accurate historically at former peaks in this relationship back in 2006-7, along with 2011 and 2015. (These former signals marked peaks in the ratio of Equal-weighted SPX vs. SPX)
Thus, either a DeMark-related exhaustion signal which is confirmed would be helpful, and/or a reversal back above former May 2020 lows would also serve to pique some interest about the possibility of a relative bottom in the Equal-weighted S&P 500, vs. SPX.
In conclusion, this doesn’t suggest that a broad-based rally can’t happen right away. Rather, it does suggest that even if other sectors begin to turn back higher, they likely won’t outperform large-cap Technology meaningfully, given large-cap Technology’s representation within SPX.
Additionally, any peakout in Technology towards the latter part of June might also bring about a peaking out in other sectors concurrently, given that it’s unlikely that this ratio turns up right away.
Overall, this had been a ratio which I felt might have a chance of turning higher in 2024 back in January. However, the bullish momentum in large-cap Technology has kept the SPX performing much stronger than the Equal-weighted SPX and that doesn’t seem ripe to change right away.
S&P 500 Equal-Weight ETF / S&P 500 (Cap-Weight) ETF(Monthly)
Consumer Discretionary breakout worth keeping an eye on
Consumer Discretionary (“Discretionary”) looks to be finally starting to round the corner, as XLY pushes above a key downtrend line that’s marked resistance since this peaked in March.
I’ve noted in prior reports that equal-weighted Discretionary looked primed to turn back sharply higher vs. the S&P a few weeks ago, and this Discretionary strength as the unofficial start of Summer is underway looks to be slowly but surely starting to accelerate higher.
As seen below, XLY 0.61% the SPDR Select Consumer Discretionary ETF has officially broken out above its downtrend from early 2024. Multi-month trendline violations tend to often lead to follow-through, in my work, and this time arguably should prove no differently.
I expect Discretionary can likely show some outperformance over the next 2-3 months before stalling out into this Fall.
My favorite technical names within the Discretionary space from a trend following perspective are as follows: TJX 0.07% , RCL -0.74% , AMZN 2.23% , RL -2.21% , CMG -5.16% , BKNG 0.68% , ANF -0.51% , YUM 0.01% , TSCO -1.38% , and ROST -1.79% .
My favorite “Up and Comers” which are down more than 20% off their 52-week lows, but show some promising signs of potential trend reversal are as follows: TSLA 0.53% , BBY 0.02% , ULTA 0.51% , CZR 2.32% , and NKE 0.14% .
Overall, this sector likely will continue to be one to utilize selectivity when selecting technically attractive long positions. However, in the short run, I expect Discretionary to outperform into August before settling. XLY 0.61% , as shown below, should rally to $184-$186
SPDR Consumer DiscretionaryETF
Silver and Gold look ready for a rally back to new highs
One potential positive takeaway from falling rates concerns precious metals which have begun to turn up sharply again as real rates have begun to turn lower.
Gold moved to new weekly highs on Thursday, while Silver also made an abrupt reversal. (Some might not consider Silver a true precious metal, but I’m including it here.)
As shown below, Silver has merely consolidated the sharp rally into early May and still looks quite appealing technically given its stellar uptrend.
Silver broke out vs. gold relatively speaking, last month, and still should show better relative strength over the next few months on its way back to new all-time highs.
Thursday’s rally back above late May lows suggests that this consolidation has likely run its course. Moreover, a push back to new all-time highs is likely which should help it reach $36 initially, then $42.
Given that the Metals typically outperform during times of falling Treasury yields, I suspect that the next few months should be quite good for both Silver and Gold, along with mining stocks.
Until some strong evidence of rates bottoming out happens, it’s right to consider Materials sector and the metals and metals stocks as Overweights. SLV -0.85% and SILJ 0.71% are two possible ways of gaining exposure to Silver and Silver mining stocks, respectively. Those investors who have a higher risk appetite might consider AGQ 0.99% , the ProShares Ultra Silver ETF.
Silver Futures
