Wed, May 15, 2024 | 5:49PM ET

SPX, QQQ push back to new highs; REITS are raised to Technical Overweight

Name: FS Insight
Price range: $$$

Mark L. Newton, CMT ^AC

Head of Technical Strategy

Key Takeaways

QQQ, SPX, Russell 3000 push back to new highs which is intermediate-term bullish

QQQ shows TD Sell Setups which might lead to 3-5 days of consolidation

REITS are being raised to Overweight and likely outperform for 3-5 months

SPX, QQQ push back to new highs; REITS are raised to Technical Overweight

Equity trend bullish but one can’t rule out some temporary consolidation after this push back to new high territory as QQQ, SPX consolidate gains before rallying further. Yields and the US Dollar have begun to accelerate lower but lie near uptrend line support and have not yet broken down materially. Overall, short-term trends remain bullish, and momentum and breadth are supportive of further gains into June technically. Whether or not investors choose to hold out for possible consolidation here is a tough choice but I suspect that any weakness proves temporary and will still result in gains into mid-June. It’s arguably right to be bullish, and consolidation would make SPX more attractive for further gains up to 5400.

^SPX, QQQ have officially joined the Nasdaq Composite back at new all-time highs, while DJ Transportation Average, Russell 2000, DJIA and Equal-weighted S&P 500 remain shy of these levels.

This minor divergence is not seen as a concern but is part of a normal process of various averages pushing back to new highs “one by one” in a manner where the rally slowly becomes more broad-based in nature.

Specifically, the act of Treasury yields extending their declines across the curve along with the US Dollar is thought to be quite important and supportive of the rally in risk assets. (As mentioned in prior reports, this recent decline has occurred as economic data has missed expectations, but has also had the effect of tempering sentiment for most hedge funds.)

As discussed last week, the breakout in AAPL was thought to be a big positive for Technology and for US Equity indices given AAPL’s concentration, and Technology has managed to hold up and start to relatively outperform following a difficult couple of months.

Furthermore, the act of Healthcare having bottomed out in the last two weeks was also quite important and worth mentioning, given that this sector is the 2^nd largest within SPX

Small and Mid-cap styles have demonstrated better strength since mid-April. They haven’t officially broken out relatively speaking to the broader market and now Russell 2000’s ETF IWM lies right near important highs from late March.

Below is a daily chart of IMV the Ishares Russell 3000 ETF, which accounts for over 90% of all liquid, tradable names in the US Stock market. It’s a bullish development to see IMW move back to new highs, even if other indices like Value Line’s Arithmetic/Geometric Average have not yet accomplished this feat.

It’s right to be bullish but any minor consolidation that serves to fill the gap to Wednesday’s breakout likely would find strong support near 298-299, which would make this quite attractive, in my view.

iShares Russell 3000

Why I wouldn’t be surprised to see short-term consolidation take hold

While I am quite bullish about the prospects for a continued rise in US Equity markets into mid-June and then likely into mid-August, it’s hard to bet on a continued interrupted rise, and there might be a chance of some consolidation over a 3-5 day period.

I suspect this could happen based on the following reasons:

TNX is now down to support at 4.35%. Its decline was a chief catalyst for the recent upswing in Equity indices. While I expect a big decline in Treasury yields down to test and break last December’s yield lows under 4%, there hasn’t yet been a breakdown of the existing uptrend.
QQQ now shows DeMark-based exhaustion (TD Sell Setups on a daily and also 240-minute basis) on Wednesday’s breakout. (Nine consecutive daily closes where the close is above the close from four trading days ago) While these don’t often constitute sell signals of any magnitude on daily charts, they can be important in allowing for a strong move to “take a breather” before the move continues.
Equal-weighted S&P 500 along with DJIA, Russell 2000, and DJ Transportation Avg. have not yet broken out. These might take more time but the negative divergence (some Equity indices hit new highs, while others don’t) normally can suggest some backing and filling before the rally can continue.

However, overall, I am quite bullish on US stocks here and do not see any more than a short-term consolidation and even this is not a strong enough possibility to really warrant any action given those investors with a 3-5 month timeframe.

I am encouraged about the larger breadth levels, along with the cycle composite showing a bottoming in May and pushing higher into August. Furthermore, intermediate-term breadth levels are constructive and getting better. (More and more sectors are beginning to show more relative strength.) Sentiment remains rather subdued and not nearly as optimistic to warrant any kind of market top. Finally, Technology, Healthcare, Industrials and Financials all remain bullish and look to be strengthening. This combination is typically hard to fight.

The chart below highlights the daily QQQ chart which now shows a completed TD Sell Setup following Wednesday’s breakout back to new highs (5/15/24). These can sometimes lead to consolidation before the move continues, but I suspect this should prove short-lived in duration and scope. Overall, I prefer staying bullish on US indices, expecting that dips should prove buyable and higher prices are likely. Bottom line, it’s always difficult to consider selling a move back to new all-time highs.

Nasdaq QQQ Invesco ETF

Lifting REITS to a Technical Overweight- REITS have broken out as yields have retreated

It’s right to lift my REIT weighting to a technical Overweight from Underweight as this sector has just broken out on an absolute basis along with a relative basis.

Last night’s discussion centered on a possible stalling out in REITS near the ongoing trendline connecting peaks on EWRE, the Invesco Equal-weight Real Estate ETF.

This trendline was officially exceeded on Wednesday, along with a breakout on REITS relative chart vs. S&P 500 (both on an Equal-weighted basis).

I feel this REIT overweight should last potentially 3-5 months but might last into next Spring as that’s what the cycle composite says could be a low for yields heading into 2025. (Some of the reasoning for being bullish on REITS centers on Treasury yields moving lower over the next 3-5 months at a minimum and potentially into next year.)

Finally, this technical switch makes senses given the sentiment on REITS, which shows Portfolio Managers allocation to REITS at the lowest levels in 15 years (see further information on this in the chart below)

The immediate chart below shows RSPR vs RSP (Equal-weighted REITS ETF vs. Equal-weighted S&P 500) which has just made a breakout after a lengthy downturn. I suspect this rally can continue.

Equal-weighted REITS etf vs. Equal-weighted S&P 500

My Favorite technical REIT picks are as follows:

WELL SBRA, DEI IRM CTRE SLG AKR HIW REAX LAMR ESS WSR JLL GOOD IIPR, IRS CHCI STRW, BEKE DOC

However, these remain just a few among a large group of potential candidates that likely will face a better 2^nd half of 2024 on the prospect of lower interest rates.

BofA Global Fund Manager Survey Sentiment on REIT allocations has reached 15-year lows

I found this extraordinarily insightful from a contrarian perspective as the Fund Manager Survey from Bank of America’s Fund Managers showed Real Estate allocation to have collapsed to a net 28% Underweight, the lowest allocation since June 2009, nearly 15 years ago.

Real Estate ETFs are breaking out today on an absolute and relative basis which makes me think this sector will enjoy a 3-5 month period of strength as Interest rates fall.

Bank of America Global Fund Manager Survey Sentiment

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