Equities spent the past week consolidating their most recent all-time high made on October 17th. The chart below shows the S&P 500 pulling back to a neutral position on the daily oscillator studies. The RSI is uptrend oversold, the MACD is rolling to a tactical sell signal, and near-term support is at 5763 with price at 5808. The near-term is a breath of calm with some light profit taking in the markets.
In the Geo/political realm the campaign for the US Presidency continues to be a dead heat. War in the Middle East continues, but there have been some signs that Israel will not bring its most aggressive measures to bear against Iran. Economic data out of China has cooled since prices surged in September. US equities have re-established leadership against ex-US counter parts in the developed and emerging geographies.
US Sector performance has had low dispersion over the past 12 months. It seems from this vantage point that investors have backfilled this bull market by supporting many of the stocks in 2024 that were no-shows in 2023. A look at some of the breadth measures for the S&P 500 show a very strong democratic bull trend in 2024 after a very choppy 2023 for the average stock. The improved breadth of 2024 supports the idea that this bull market trend can continue higher and that the current environment is a good one for stocks.
The chart below shows the % of stocks above their 50-day moving average and 200-day moving average in the middle panel.
As we’ve mentioned in our past letters, we think the direction of interest rates is going to be a primary determinant of sector leadership going forward. Rates have been backing up recently and the 10yr Yield (chart below) sits at near-term resistance around the 4.30% level. The proof will be in the pudding. The number of stocks above their 50-day moving average has been moving steadily lower as rates have been moving higher. That’s the opposite of what the equity market wants right now. That makes this an important week to keep an eye on the action in the 10yr yield.
–Patrick Torbert, CMT | Chief Strategist, ETFsector.com
Sector ETF’s/The Week in Review
With commodities’ prices continuing their recent retreat last week, it was Growth sectors leading the tape. TSLA drove the Discretionary Sector to the only positive gain in a week market by corrective price action. The defensive side of the market saw profit taking despite a bearish near-term tape. Utilities have been a positive standout among lower vol. sectors. Real Estate is at a pivot point, while our process has us avoiding Healthcare and Staples exposure at present. We do wonder how long Utilities stocks can keep up their winning streak. They are YTD leadership at the sector level having advanced 29.85% on a total return basis since January 1st.
TSLA a key chart to watch from here
Earnings season started out with a surge from Financials, but rising rates have taken some of the wind out of those sails. TSLA has been the most recent bullish catalyst, posting a strong quarter last week. The chart (below) is at a very interesting position with price marginally eclipsing a key resistance level at $268.80. Upside follow through suggests a retest of all-time highs over the longer-term which is roughly 48% upside on a capital appreciation basis. The Mag7 have faded from their 2023 perch atop the leader board, but from a technical perspective a resurgent TSLA would go a long way in re-animating the trend. NVDA, AAPL and META still look like very strong charts. GOOG/L look like accumulation opportunities. AMZN and MSFT look more worrisome, but there would likely be a significant halo effect if one or two of the 7 got back in the saddle again. TSLA bears scrutiny. Hard to see it breaking higher if rates are also going up.
SOX Index continues in consolidation
Much like the Mag7, Semiconductors have affected a significant pullback over the past few months and continue in an ambivalent consolidation. There are conflicting characteristics in the chart below, but there was no serious long-term momentum divergence ahead of the big correction from early July through early August. What it looks like most is a basing pattern, but it will likely be path dependent on the equity market. Taking out 5445 would increase conviction in the bullish reversal scenario. We continue to like the SOX Index as a risk appetite barometer. A break-out to the upside would have us pressing longs on upside Growth exposure and Mag7 exposure through Financials, Discretionary, Tech and Comm. Services allocations.
We will be putting out a piece on long-term bull market trends later this week. I will foreshadow the conclusion for you. This current long-term bull market coming out of 2022 has plenty of potential to keep running. However, as rising yields remind us persistently, we are now on the tricky other side of an inflationary scenario, where we have convinced ourselves its gone, but we too much bullish exuberance could potentially have it coming right back. We should take the current bull trend for what it is, but we need to keep a sharp eye on our gages.
Data sourced from Factset Research Systems Inc.
