S&P is growing closer to its short-term upside technical target of 5521, while QQQ also is nearing resistance a bit higher than 483-5 mentioned last week. Overall, there remains no evidence of weakness in SPX, nor QQQ, and until price violates the rising 5-day moving average and confirms daily exhaustion signals, trends remain bullish, and it’s wise to stick with this trend. Cycles show Late June as marking a possible short-term peak for QQQ, but proof in the form of a break of the current uptrend will be key for confirmation.
SPX continues to push higher, albeit at a slower pace on lighter volume in recent days. Technology, to its credit, continues to lead all sectors on a 1-week, 1-month, 3-month and YTD basis.
The degree to which other sectors have begun to fall behind has grown a bit more pronounced lately, as nine equal-weighted sectors are now lower over the past month. However, this divergence between the average stock and large-cap Technology certainly hasn’t gone unnoticed, and countless posts on Financial Twitter (X) are now mentioning and doing so negatively.
My own thinking is that this divergence will be resolved eventually, but it doesn’t have to be right away. Furthermore, this also doesn’t suggest that a broader-based rally is imminent to the detriment of Technology.
My charts later in this report show that a possible snapback in the Equal-weighted Financials looks to be happening this week. This remains an important part of SPX, and Financials likely can outperform from mid-June into August.
Overall, sectors like Utilities have been weakening in recent days, while Financials, Industrials and Discretionary have begun to strengthen over the last week.
As shown below, SPX lies just below an important overhead target which seems to intersect near 5521 and stretches up to 5534.
$&P 500 Index
Overall, I do suspect that SPX likely finds short-term resistance into this 5521-34 range before stalling out, sometime in the next 1-2 weeks. However, I expect after some short-term consolidation, higher prices still materialize into mid-to-late August.
Moreover, it’s difficult to suggest anything more than just a minor 2-3% pullback into July. Additionally, the technical thesis of a weakening US Dollar and Treasury yields looks to be materializing, and this should be supportive of risk assets into the early Fall. Thus, it’s expected that weakness in the back half of June should prove short-lived and make SPX attractive for further gains into August.
Utilities recent weakness should be used to upgrade this Sector to Neutral, technically speaking
The chart below shows the big breakout in the Utilities sector earlier this year, when using the SPDR Select Utilities ETF (XLU -0.07% ) as a gauge.
This pullback since May doesn’t yet look complete, and large constituents like NEE 0.46% still have the capacity to weaken over the next week.
However, momentum remains positive given the strength seen since early this past Spring. Despite a -4.40% decline in XLU over the last month, this remains the 2nd best sector (behind Technology) on a three-month basis, returning +9.00%. (Performance is based on the 11 SPDR Select ETF’s.)
XLU -0.07% officially made its June peak right under $73 on 6/3. Thus, a 5.4% pullback in this sector at a time when momentum and broader technical structure has improved signifies a time to consider raising Utilities to Neutral.
I expect XLU to likely bottom around $67.66 at a maximum level of support before turning back higher in the months ahead. Falling Treasury yields should be positive for Utilities, and I suspect that July might be a more difficult month for Technology and for SPX than the period from mid-April into late June.
Thus, any signs of defensiveness returning to the market likely also could aid Utilities in the months ahead. $73 is the first upside target on gains into July/August, but the ability to exceed $73 likely lifts XLU up to challenge all-time highs near $78.
Utilities relative to SPX have improved somewhat, but remain trending down over the last few years
This weekly relative chart of the Equal-weighted Utilities vs. Equal-weighted S&P 500 shows the recent breakout which happened in Utilities this past Spring which has led to outperformance this year. This chart below helps to explain why Utilities might be ranked as a Neutral sector, technically speaking, but not Overweight.
(Equal-weighted ratio charts are used given that NEE 0.46% , SO -0.10% and DUK 0.59% represent about 30% of the XLU alone.)
While some investors are quick to suggest that the comeback in Utilities is a return to Defensiveness that might be troublesome to risk assets, I disagree for the following reasons:
- Other Defensive sectors like Staples and REITS are trading at/near 52-week lows
- Long-term downtrends in relative charts of RYU to RSP -0.13% remain trending down since 2020.
Thus, while the minor breakout earlier this year of a one-year downtrend was thought to be a positive for Utilities vs. the S&P, the intermediate-term downtrend remains very much intact.
Overall, given the positive momentum in this sector in recent months, the minor pullback in Utilities in the last few weeks should make this sector attractive for a bounce which might carry this relative chart up to the longer-term downtrend line.
Technically speaking, my favorite Utilities to overweight are as follows:
VST -0.43% , NRG -0.80% , CEG -2.32% , PEG -0.10% , CNP 0.74% , SRE -0.03% , SO -0.10% , AEP 0.99% , ATO 0.22% , and DUK 0.59% .
Financials have begun to strengthen; Breakout above downtrend for Equal-weighted Financials looks positive for this sector
Despite the ongoing rally in Technology, it’s thought to be a minor positive that the Financials sector has successfully broken out above a downtrend since May.
The Equal-weighted Financials ETF daily chart has broken its downtrend from last month which is considered a positive for this sector. Moreover, given that Financials represents around 12.5% of SPX, this is a positive for the broader market.
Stocks like RF 1.35% , MCO -0.44% , DFS -2.11% , MTB -0.12% , NTRS -0.73% , and AMP -0.78% have all risen more than +3.5% in the rolling 5-day period ending 6/18/24.
XLF has strong resistance near $42.50, but I do suspect XLF can exceed this level and might rally into August before a larger stalling out.
In the short run, Financials look attractive, and I expect some near-term outperformance vs. SPX.
Invesco Equal Weight Financial ETF
