Markets have begun the process of bottoming out and have carved out the first meaningful move off the lows since late last week on above-average breadth data. Wednesday’s FOMC meeting proved to be a non-event as despite the FOMC having lowered growth forecasts and hiked inflation, they failed to judge a rate cut as being necessary. Thursday’s economic data seemed to underscore this enthusiasm with better than expected readings from Jobless Claims and also Philly Fed Business Outlook. Overall, it’s thought that a rebound in Equities might help to cure some of the poor sentiment readings at a time when the “hard” economic data has failed to show much deterioration. Technically speaking, the rebound in Technology, along with large-cap Financials and Discretionary in recent days, is encouraging, and it looks doubtful that SPX will require any movement under 5600 and should begin to turn back higher into next week. As discussed in previous days, the combination of sentiment data turning fearful followed by an above-average surge off last week’s lows looks bullish for Equities in the months ahead. Overall, it looks right to position long with movement above 5703 on a close, leading to a meaningful rally back to new all-time highs. The downside arguably should be limited to roughly 3%, while the upside back to new all-time highs should get underway to carry SPX up more than 9% initially.
As shown below, the rally off last Thursday’s lows has helped SPX regain its 50-day moving average, which has begun to slope higher this past week. That’s a welcome development as SPX fell under its 50-day m.a. three days after the market peak on 2/19 and has remained under this m.a. until early this week. (While I don’t put much stock in the power of 50-day m.a. as support, I do find that the slope of a m.a. and the percentage above and below can have far more importance.)
As shown below, the minor backing and filling seen during Thursday’s trading failed to do much damage to the new uptrend that looks to be getting underway. While a brief consolidation move is proper following a steep advance, I don’t see SPX getting back under 5600 in the days ahead. Thus, if my thinking is correct, last Thursday’s bottom stands a 75% chance of being correct, and movement back over 5703 should help jump-start the acceleration.
S&P 500 Index
Three factors looked most important this past week as to why Equities might be bottoming:
- Severe bearishness looked to have turned more capitulatory, with the Equity Put/call ratio having neared 1.0 while VIX showed evidence of term structure inversion. Bank of America’s recent Global Portfolio Managers report illustrates some of the more negative retracements from US Equities in allocation of all time.
- Breadth gauges such as McClellan’s Summation index and SPX “Percentage stocks above 10 and 50-day moving average(m.a.)” failed to break down under January lows and have held up remarkably well despite the damage in SPX and QQQ.
- Advance/Decline surge off the lows on back-to-back days is a welcome development following the recent quick 10-15% decline in SPX and QQQ off recent all-time highs from February.
Discretionary has begun to sharply move back higher vs. Staples
One of the technical observations I feel is important to mention, which gives credence to the idea of Equity markets bottoming, is the higher turnback in the ratio of Consumer Discretionary to Consumer Staples. This relative chart highlights the ratio of RCD vs. RHS (Invesco’s Equal-weighted version of these ETF’s shown in ratio form).
As of the last two days, the entire downtrend from mid-February has been exceeded, and signs of Consumer Staples faltering last week proved to be an excellent early technical bullish sign for the prospects of US Equity markets trying to bottom out.
It’s right to favor Discretionary Strength over Staples in the weeks and months ahead. Technically speaking, Consumer Discretionary looks highly likely to outperform between now and this Summer. Ratios like RCD vs RHS, as shown below, are highly likely to rally back to 2025 highs following the recent trend damage.
RSPD / RSPS
Regional Banks have begun to look appealing after the pullback to trendline support for KRE
Increasingly, I feel that Regional banks should be given a closer look, given the degree of damage that has occurred since the peak last fall.
Much of this renewed interest is due to the SPDR S&P Regional Banking ETF (KRE 0.24% ) stabilizing at a key area of trendline support.
Technically speaking, the short-term trend is still bearish, but the intermediate-term is bullish. Moreover, KRE’s recent weakness looks to have successfully held where it needed to in order to create a very favorable risk/reward.
I like buying/adding to KRE here and expect a rally up to 62.50-63 in the short run. A move back to new highs will take time but certainly is possible as Small-caps start to kick into gear.
Meaningful support is 54.56-55 and this cannot be broken without postponing the rally and causing more downside to 51-52. However, I don’t expect that and feel like rallies should be getting underway.
SPDR S&P Regional Banking ETF
KRE is getting close to bottoming relative to XLF
Interestingly enough, the DeMark-based exhaustion counts on the ratio of KRE 0.24% to XLF are getting very close to triggering TD Buy Setups on a weekly chart for the first time since last fall.
As shown below, the weekly count requires just 2-3 more weeks of underperformance before KRE could bottom out, relatively speaking to XLF.
This would also be a bullish signal for small-caps, and while pre-mature, it looks right around the corner. (More on this latter topic of Small-caps in tomorrow’s note.)
For now, as the ratio of KRE reaches the prior lows from last Spring, my feeling is that a bottom is likely, technically speaking. Furthermore, this should translate into KRE 0.24% , which is likely beginning to show some possible outperformance vs. the entire XLF -0.36% ETF as the month of April gets underway. I’ll monitor this in the weeks to come.
KRE / XLF
