S&P and QQQ both showed minor weakness late this week, yet failed to do much technical damage. Both SPY and QQQ finished positive on the week, and while there was brief signs of rotation out of Technology, it doesn’t look to prove long-lasting. Equal-weighted strength earlier this past week was encouraging towards thinking many non-Tech related sectors could be starting to turn back higher to erase some of the recent divergence. At present, US Dollar and TNX look to be on the verge of large declines into August, and I suspect that the broad-based rally should get underway as 3Q gets underway. Overall, I see no evidence that our minor pullback from Thursday/Friday is indicative of anything more than just minor consolidation before yet another push back to new high territory.
Reasons why our minor selloff shouldn’t grow too severe and could be complete by early next week:
- Elliott-wave patterns look overlapping and choppy on hourly charts, not severe weakness from the high in an impulsive five-wave decline on heavy volume and negative breadth
- RSP along with DJIA did show minor technical buy signals relative to SPX which got underway late this week. However, the trends in SPY remain quite strong, thanks to Technology. Furthermore, without more evidence of technology weakness, I suspect that SPX very well could outperform RSP until the US Election.
- DeMark-based counter-trend exhaustion failed to trigger any kind of weekly “13 Countdown signals” (Sells) at the peaks this week. While Daily signals are apparent on SPY and QQQ, neither is confirmed, and weekly signals will require at least another two weeks of rally before any decline gets underway.
- There remains no evidence that Tech’s waning late this week represents anything more than just a few days of consolidation, as opposed to a bigger peak for Technology.
- Sectors like Consumer Discretionary, Financials, and Healthcare all showed progress this week, and sectors like Industrials look to be on the verge of turning back higher after nearly two months of consolidation.
- Interest rates and the US Dollar both “tipped their hands” on the decline into early June which turned the technical patterns for both bearish. A drop to new monthly lows should happen in the weeks ahead.
- Sentiment has turned a bit more positive than a week ago, but not nearly as optimistic as what would be required to expect a peak in Stock indices.
- Seasonality remains positive in Election year June’s and July’s going back since 1950 with median returns in both months above 1%.
- Trends have not been broken for either SPY, nor QQQ and until at least minor evidence of a pullback appears, it’s difficult to bet against the US Stock market.
Patterns in SPY along with QQQ on multiple time frames haven’t turned bearish
The key reason why markets typically start to weaken isn’t normally based on Triple Witching expirations, or Earnings, or Fed policy, but normally is based much more closely on extremes in sentiment at a time when cycles start to show inflection points. Moreover, the first sign of price failure when this happens, is normally something to respect.
At present, we’ve seen nothing to suggest that is happening just yet, and the cycle composite for SPX doesn’t seem to turn down sharply in late June. Rather, this turns in mid-July with a larger peak by early September.
Below is a daily SPX chart, which has shown just scant signs of minor consolidation. Yet, no discernible evidence of any real damage has occurred. Thus, while AAPL and NVDA both weakened, other sectors stepped in to pick up the slack and the resulting damage proved benign.
SPX cash index looks to have possible support at 5400-3, with a maximum drawdown leading to 5376, the latter which might prove difficult on this first pullback. Following some minor weakness into Monday, I suspect that a bottom is close and SPX should push back up to new highs, and might rally further until mid-July. Once there looks to be a bottom in place early next week, some guidance on upside projections will be possible.
S&P 500 Index
S&P Futures hourly chart below shows the overlapping, choppy attempt at a decline over the last few days, which has barely made a dent in the ongoing trend.
I suspect that the maximum area for S&P futures to find support will materialize at 5490, while SPX cash index has strong support near 5400-3.
S&P 500 Futures
Industrials weakness is nearing completion
Earlier this week I discussed Financials, Discretionary and Healthcare, but today’s discussion centers on Industrials being near support.
As shown below, the sharp two-month consolidation is now nearing a meaningful trendline drawn under the rising trend for XLI -0.18% vs. RSP -0.23% . (SPDR Sector Industrials ETF, vs. the Equal-weighted S&P 500)
While Industrials have been out of favor since March, I expect this sector starts to bottom out on an absolute and also relative basis, and likely shows some above-average relative strength into late August.
Weekly evidence of exhaustion on this recent relative decline should be apparent sometime in the next two weeks just as the sector has reached trendline support vs. the Equal-weighted S&P. ( Yet again, I am avoiding using SPY in my relative pairings as this is simply a bet against Technology)
S&P 500 (Cap-Weight) Industrials ETF / Equal Weight S&P 500 ETF
Technology was the only Outperforming sector over the last month
While markets have seemingly been defying gravity for the last two months, Technology has diverged in a big way vs the broader market which hasn’t been able to keep up.
As shown below, the only Equal-weighted sector ETF (of the major 11 ETF’s that make up both Cap-weighted and Equal-weighted sectors) which was able to outperform the S&P 500 as well as the Equal-weighted S&P 500 in the rolling one-month period was Technology.
Moreover, only three Equal-weighted sectors and four Cap-weighted sectors out of 11 were positive in the last month.
This shows the extent that Technology has so thoroughly dominated performance while most other sectors have lagged sharply in the past month.
However, in the last week, seven sectors outperformed the S&P 500 on an Equal-weighted basis, and sectors like Consumer Discretionary and Financials rose more than 2.00%. This is encouraging at a time when Technology performed roughly “In-line” and XLK 0.11% underperformed in the past week.
For the market bulls, this seems like good news, as our recent divergences and underperformance by many sectors did a bit of an “About-face” this past week (and in a good way, given that many outperformed)
I suspect that over the next few weeks, there will be more evidence of other sectors starting to show absolute gains, and participate as the US Dollar and Treasury rates drop. However, I cannot say for certain that Technology will lag, and/or that Equal-weighted S&P 500 should outperform SPX as I don’t think that Equal-weighted outperformance is likely given Technology’s strength.
S&P 500 Sector ETF Returns
