It may be time to look for new leadership.
Broadening breadth
Breadth indicators are starting to broaden out. The ratio of equal-weighted to float-weighted S&P 500 and NASDAQ 100 bottomed out in the last month.
Here are some ideas for sources of outperformance with the caveat that they mostly depend on a soft landing, which is still in doubt . I pointed out on the weekend that travel related stocks have been surging. The hotels, airlines, and cruise ETF (CRUZ) staged absolute and relative breakouts. Keep an eye on the Delta Airlines earnings report tomorrow (Thursday) as a possible bellwether for the group.
A similar relative improvement in energy stocks can also be seen in Europe, which is a helpful confirmation of sector strength. Drilling down, the relative bottoming pattern is more pronounced in oil exploration stocks. The high beta oil service companies is even showing more relative strength. I interpret these patterns as indicators that energy strength is broad based and poised for outperformance.
The NFIB June Small Business Survey provides some hopeful signs for small-caps. Small business optimism has ticked up, which is constructive.
Small business earnings appeared to have bottomed. If they are representative of small-cap trends, this should be a positive fundamental tailwind.
Market stall or “good overbought”?
As for the S&P 500, the index surged to a new recovery high in response to a softer than expected CPI report. The 5-day RSI is overbought. The bullish interpretation is this could be the start of a series of “good overbought” advances. The bearish interpretation is we are seeing ominous negative RSI divergences.
Even though my personal opinion leans bearis, I am unwilling to put on a short position as long as price momentum is positive. Technical interpretations aside, how this really plays out will depend on earnings season, which is just starting. Stay tuned.
Earning season is important for the Value sectors to start outperforming. Small cap indexes are Bank heavy. I’m impressed the Tech sector is correcting sideways. Impressive after such a run. I had expected a bigger drop after quarter end window dressing.
Overall picture looks very promising.
1. XLI ATH, XLB, XLE coming up. Just need XLF to join and confirm.
2. XLU, XLV, XLP doing nothing.
3. XLY, XRT coming up.
4. XLK, XLC very strong.
5. IYT/JETS strong. PAVE ATH, SMH very strong, ITB ATH and XHB at the door step
6. USD in danger of falling substantially
7. Wall St consensus very negative for the rest of the year
Excellent post!
I don’t know how to read the sentiment. It seems TAs are getting more bullish while the Macro guys are still on the sidelines. Also, the sentiment gets more bullish as price goes up but it is very fragile. No conviction in this rally for sure.
Sell-side guys will be falling over each other to raise their targets as the rally continues over.
A fall in USD would be great for tech, multinationals, commodity plays. Would be nice if China injects some stimulus into their economy.
Now just need the Fed to pause and the ECB / BoE to continue their hikes for USD to take a dive.
It’s funny, all of the bearish factors like debt, deglobalization, student debt non forgiveness are ignored…woohoo inflation is down to 3%. When things crash all the bullish factors get ignored.
Will inflation go down the elevator shaft to negative? Nobody knows, but I am very suspicious of this market reaction to the 3% inflation print.
The student debt thing feels like a real headwind if it is enforced…3 years of no need to pay off the loans goes poof! It’s one thing to raise rates and slow down credit growth, but student debt already exists, it’s relevance is immediate. I suspect we will hear more about this, especially with elections in the not so distant future.
This rally is driven by sentiment and (bearish) positioning, and a narrative of soft landing based on hope.
I don’t think it is based on fundamentals. If you just invest on fundamentals and valuation, you’ll totally miss it.