Trend still bullish- Expecting upcoming push back above SPX-4200 -Any break of 4104 would turn trend short-term bearish
Technology yet again has begun to dominate market performance and has begun to camouflage some of the weakness being seen in other sectors.
While NVDA results resulted in strong upside performance for Semiconductor stocks, market breadth finished at more than 2/1 negative, with Healthcare, Energy, and Utilities finishing down more than 1% on the day.
However, this Tech surge is not only not being followed by other sectors: Rather, sectors like Energy, Utilities, Consumer Discretionary, Financials and Materials have begun to show meaningful signs of weakness that, if not reversed in the next couple weeks, will likely coincide with a drawdown not dissimilar from March.
Technology has been able to rise, regardless of Treasury yields also pressing higher. Over the last year it was widely thought that Yields pressing higher would be a negative influence on Technology, and vice-versa.
As mentioned yesterday, the price action in SPX failed to break down sufficiently enough after weak back-to-back days on Tuesday/Wednesday to cause any material support violation.
Overall, one still cannot rule out a push above SPX-4200, which would astound most fundamentally oriented “market bears” along with many Technicians who assume that breadth weakness should lead markets lower sooner than later.
While I don’t disagree about the probability of a correction if recent sector weakness cannot be immediately recouped, there hasn’t been evidence of Technology weakening in a way that would make investors want to avoid the market.
Those that write off big-cap Technology as being an outlier miss one important point: This Tech strength and rotation into Growth likely can last longer than many who are trying to fade this recent strength have patience for. Eventually, portfolio managers who are underweight Technology will lose patience on underperformance and throw in the towel and start buying.
Furthermore, many who are dismissing breadth as being poor recently (and are not incorrect) fail to realize that breadth usually does turn down when indices uptrends morph into sideways patterns like what has occurred over the last three months.
Analyzing the percentage of stocks that are failing to beat the SPX misses out that the reason this is happening is that the heavily big-cap Technology dominated SPX is charging higher specifically on the strength of these names. While this divergence eventually can prove problematic, it will be resolved in one of two ways:
First, Large-cap Tech stalls out and rolls over sharply while other sectors do not play catch-up and rally to show mean reversion higher to pick up the slack to Technology.
Second, Tech carries indices higher sufficiently to make investors throw in the towel on shorts and other sectors naturally play catch-up and strengthen.
Thus, while I fear that the recent breakdowns to multi-week lows in many Equal-weighted sectors likely is a concern, it’s premature to weigh in that markets require an immediate major selloff because they’re too heavily dominated by an overbought Technology sector. Until Tech stalls and rolls over in a way that’s meaningful, it’s right to stick with Tech, and it’s also right to stick with US Stock indices.
Given that SPX bounced from 4104 on Wednesday to 4151 in Thursday’s session, 4104 becomes the new “support” to consider important on declines. Pullbacks under 4104 should have little support until 4048.
However, on the upside, 4180 now is also important. Exceeding 4180 should drive SPX up to 4235-4275 without much trouble. If and when this happens, and breadth were to still register negative readings, this would likely represent a problematic situation and a high risk scenario for trading longs.
As has been mentioned, keeping above 4048 keeps SPX in a good technical position. Even on a break of 4104, it’s still likely that 4048 could hold on weakness. The next week will speak volumes about the current technical situation and it’s important to keep on top of sector rotation, along with changes in sentiment.
Energy remains “OK” but patience is running thin
Energy has been a disappointment during (what should have been) a bullish seasonal period. While one cannot completely write off Energy’s chances for the months ahead, it’s important to recognize what the current trends suggest, along with where the risk would be if/when Crude and/or Energy would start to break down in the weeks to come.
At present, the uptrend from last Summer remains intact for Equal-weighted Energy ETF’s from Invesco ($RYE). However, any break of mid-May lows of $63.60 in RYE ($75 in $XLE) is a technical concern, and would raise the likelihood of additional selling pressure in Energy.
For now, I’m still of the opinion that Crude and Energy can extend higher in the recent bounce from early May. However, it’s always prudent to know where one is wrong, for hedging, stop-loss, or speculation purposes.
It’s worth pointing out that Energy has been a huge disappointment this year. At present, intermediate-term uptrends remain intact. However, breaks of support at $75 would violate uptrends from early 2020 for $XLE. ($61.95 for RYE)
Combined with cyclical projections shown below, such a development would warrant putting Energy on the “back burner” for a Summer correction ahead of a large intermediate-term rally in the back half of 2023.
Crude cycles might lead to weakness into Fall ahead of a strong rebound into 2024-2025
My updated WTI Crude cycle doesn’t appear as bullish as when first presented back in early 2023. While my composite still points to strength into 2024 and even into 2025, it’s not without volatility.
Weekly Crude cycles show weakness into August of this year ahead of a large rally. At present, absolute charts will take precedence over the bearishness of cyclical projections on a 3-5 month basis until there is evidence of intermediate-term trend violation.
However, this is something to watch carefully, which would be problematic to Energy longs in all likelihood if Crude fails in its rally attempts and slips back to the low $60’s. If this were to happen, than I would have to respect this decline and expect that Crude could fall to the $50’s first ahead of a major rebound into 2024.
At present, the Energy bounce from early May does not yet look complete in my view, but would have to exceed my $79 target and ideally get over $83.50 to put Crude (and Energy) in the clear.
The next 3-5 weeks should provide some guidance on the direction for Crude and for Energy. Stay tuned.
Utilities down to ‘Make-or-Break” support levels
Utilities have had a difficult time lately, not dissimilar from Energy. Despite Equal-weighted SPX being lower by -3.57% over the last month (much worse than SPX’s +1.96%, in data through 5/25/23) Utilities have not outperformed.
Rather, Equal-weighted Utilities have fallen nearly double the amount of Equal-weighted SPX, and have declined -6.24% over the last month. ($XLU is second worst only to $XLE over the last month, down -6.43% among the 11 SPDR S&P Select ETF’s )
As seen below, XLU has pulled back sharply to an area of support near an ascending uptrend line connecting lows since last October 2022. Key XLU support lies at mid-March lows at $63.38 and for the Equal-weighted RYU is 105.64
Bottom line, breaks of March lows would be problematic technically for those seeking better performance in defensive sectors like XLU. Such a development would likely result in an XLU decline to the mid-$50’s.
At present, this is not immediately expected, but prices have fallen to a “make-or-break” area of support that needs to hold in the weeks to come.
I anticipate some upcoming stabilization and a bounce attempt by XLU. However, bounces require a weekly close back over $70.28 to have conviction of a decline not occurring in the months ahead. Failure to bounce high enough, turning back lower and breaking recent lows would also be problematic. The next week should speak volumes about the Utilities sector.