US Equity indices look to have bottomed following Monday’s 1% rally to multi-day highs in SPX and QQQ led by strength in Technology. Small, and mid-Caps could outperform in the weeks ahead, while other Defensive groups like Utilities and REITS have begun to show more evidence of turning higher. Overall, given that Semiconductor stocks managed to regain more than 50% of last Friday’s losses, this snapback in Tech is seen as a good sign. SPX likely pushes higher to test and exceed 5669, the all-time highs from last Tuesday, while QQQ should surpass its peak from 7/10 made just over 503.50.
Overall, no meaningful change in trend in the recent bounce that began last Friday, and Tuesday’s minor stalling out and weakness into day’s end should prove temporary and buyable. I do not expect SPX to undercut last Friday’s lows of 549704, nor should QQQ undercut 473.95. This minor congestion should likely start to turn back higher on Wednesday.
As discussed yesterday, gains look likely in IWM 1.23% up to $244 from its current $220, a level that roughly aligns with all-time highs for IWM. As discussed last week, the strength of the move in IWM relative to SPX was so powerful that it likely should lead to additional near-term outperformance for Small-cap shares.
Bottom line, while this might require some consolidation between September and November before pushing higher yet again, I expect IWM to show absolute and relative strength over the next 4-6 weeks.
The chart below highlights why it’s imperative to be a believer in the “Summer of Small-caps” Fundstrat’s own founder/Head of Research Tom Lee has been pounding the table with this message for weeks, but it’s only become apparent that technicals are lining up to join Fundamentals to reinforce this message as of last week.
IWM relative to the Equal-weighted S&P 500 (RSP 0.55% ) has broken out of its two-year consolidation. This is quite constructive, and bodes well for Small cap outperformance, technically speaking.
IWM vs SPY is now arguably breaking out on a weekly basis
There’s now even more proof that a “Summer of Small-caps” might truly be upon us, from a technical perspective. Relative charts of IWM vs SPY show a meaningful push above a key level of downtrend line resistance, going back since early 2021.
This is quite encouraging towards the idea of IWM likely outperforming SPY in the short-run, which I would estimate translates into a runup into late August/early September.
However, this breakout in IWM vs. SPY also means that Technology likely will lag Small-caps given its large percentage within SPY.
Thus, while this doesn’t suggest it’s right to abandon Technology, this broadening out by Small-caps does make a compelling case for diversification into other areas of the market which many investors might not have considered before July.
Following a period of Election-year consolidation from September into November, a continued period of outperformance might get underway into next Spring.
XLF should advance to 45.50-47 into August as outperformance continues for Financials
Financials have proven to be one of the top performing sectors over the last month, as the act of Regional Banks kicking into gear helped what had been an already impressive rally in many large-cap Banking shares.
Financials performance through 7/22/24 showed 1 month returns of
Interestingly enough, +5.26% for the Equal-weighted Financials ETF (RYF) and +4.26% for XLF 0.38% (Sector SPDR Financials ETF) which both ranked 2nd best over the last one-month period, trailing just the REIT sector.
The breakout above former highs in July proved to be the specific catalyst that helped to jumpstart this sector, and technicals still support the idea of further gains into the month of August.
Daily XLF 0.38% charts show the well-established pattern of a four-wave advance which would become a five-wave advance above $44.11. Given that rallies rarely end as three-wave moves, it’s highly likely that XLF will push higher to make new all-time highs over the next 3-5 weeks.
However, at that point it should prove correct to consider the area at $45.50-$47 to be strong overhead resistance for XLF.
Furthermore, a 38-50% correction to its rally from June likely could commence, starting in late August/early September.
If XLF were to reach $45.50, then a correction back to levels between $42.95-$43.50 might make sense by Election time.
Thus, a rally over the next month looks likely, but which then could morph into a pullback down to levels near where XLF is trading now.
At present, it’s right to stay Overweight the Financials sector, and favor that the recent movement in Regional Banks can continue a bit longer.
KRE is moving to multi-month highs vs KBE this month which can allow for further near-term outperformance
The breakout in KRE 0.84% (SPDR S&P Regional Banking ETF) over the last few weeks has resulted in relative charts of KRE 0.84% moving to multi-month highs vs. the KBW Banks ETF (KBE -0.43% )
Note that Regional Banks had been in a severe relative downtrend vs. KBE since 2022, underperforming sharply.
This has come to an abrupt end, as the breakout in KRE helped Regional Banks begin to claw back in a meaningful way.
Monthly DeMark-based exhaustion signals like TD Combo set to be confirmed this month on ratio charts of KRE/KBE if price remains above the closing price from March 2024 (which has been achieved as of now).
Thus, despite the steep ongoing downtrend, some mean reversion looks to be underway, and should carry KRE higher vs. KBE into September.
KIE break vs KBE makes Insurance ETF less desirable compared to KBE
One final chart on an interesting sub-sector relationship concerns KIE 0.30% , the S&P Insurance ETF, relative to KBE -0.43% .
This weekly ratio chart shows the breakdown in KIE vs. KBE that has officially violated a two-year uptrend in relative outperformance by Insurance stocks.
Thus, while there certainly are some attractive stocks within Insurance, the broader group could show further underperformance vs KBE as a result of this technical breakdown in this relative ratio.
