Tuesday brought about a very strong initial advance that brought SPX up to the key 3928 level, but failed to finish above this level at the close. DJIA also failed in this regard, but yet Tuesday did prove respectable with regards to breadth, albeit far less than early in the session.
NASDAQ, to its credit, still hasn’t taken out early March lows, but the strength in Technology has been one of the saving graces for US stocks over the last two months.
Yields backed up and retraced some of the weakness in recent days. However, it’s not a stretch to think that FOMC will consider the recent bank failures as potentially being far more important than CPI which comes in roughly in line with expectations.
Key outperformers were found in Technology, Energy, Healthcare, and Financials as at least minor evidence of at least a trading low looked to be in place.
Cycles based on my historical composite along with pre-election year March seasonality and the 80-day trading day cycle all suggest this week can be important for a possible change in trend.
Importantly, more needs to happen to confirm a strong bounce is underway. The mid-day reversal of the initial surge wasn’t necessarily bearish. Prices on most major US benchmark indices still closed up strongly and NASDAQ’s 2.3% gains proved to be the strongest rally in nearly two weeks.
Overall, given the downward momentum present in recent weeks, it’s imperative that SPX finish back above 3928, and the DJIA finish back above 32,500. Evidence of NASDAQ Composite finishing back above 11,700 would be a very good sign, technically.
While some backing and filling very well could happen post PPI on Wednesday, I’ll look for weakness to prove brief, and for rallies back above Tuesday’s highs to kick off a bounce over the next few weeks.
Technology might stall out and give way to strength in other sectors like Healthcare and eventually, Energy
Relative charts of Invesco’s Equal-weighted Technology ETF ($RYT) vs. Equal-weighted S&P 500 ($RSP) both by Invesco, shows the first counter-trend sign of upside exhaustion (Per DeMark indicators) since late December, 2022.
This represents the first meaningful daily signal that suggests the recent outperformance in Tech might wane a bit and consolidate while other sectors take its place.
DeMark indicators overlaid on this relative chart have signaled their first 9-13-9 pattern. This signifies a TD Sell Setup followed by a TD Sequential and TD Combo 13 Countdown sell followed by another TD Sell setup. This signal is complete as of Tuesday, 3/14/23’s close.
Thus, while a stock market rally was expected to begin this week, I’m skeptical that Technology will be the sector leader in performance over the next month. Sector rotation could lead to Healthcare, or Industrials outperformance, or potentially back to Consumer Discretionary after just a brief period of consolidation over the last week.
Interestingly enough, weekly relative charts of $SPY relative to $QQQ also show the first Buy signal this year (Also based on DeMark exhaustion on Symbolik charts). Overall, $SPY likely should begin to turn higher relatively vs. QQQ which speaks to the degree that a strong bounce over the next month might not show the same degree of Technology participation as what’s occurred since late December 2022.
Energy’s breakout has proven false yet again; Patience required
Technically speaking, Energy can’t “catch a break” this year, and after yet another false breakout attempt, WTI Crude’s front month futures have fallen to the lowest levels of the year, hovering just above important lows made last December 2022 just above $70.
Energy has quickly slipped to the second worst performing group for 2023, and $XLE -4.7% decline over the last 5 trading days brings its 1 month returns to -9.18%, second worst only to Financials -12.09% return.
Overall, the intermediate-term relative charts for Energy still haven’t shown sufficient weakness to think this sector should be avoided. However, we’ll need to see $74 recouped in the near future in WTI Crude to give Energy a bigger overweight.
Given the false breakout in early March that subsequently has now led to a breakdown to the lowest levels of the year in WTI Crude, Energy is certainly a sector which has undergone some definite “March madness.”
Charts of Invesco’s $RYE, the Equal-weighted Energy ETF, attempted to eclipse January and February lows near $68.61, but failed and closed the day well off the lows while WTI Crude fell 3%. This was a bearish short-term development, and Energy longs should not add to positions until evidence of RYE reclaiming $69 happens, and/or WTI Crude can recoup $74.
Ultimately, I don’t see that near-term Energy weakness changes my intermediate-term bullish view. However, given the numerous false breakout attempts in Energy, it’s proper to wait until both RYE, as well as WTI, begin to act better and show technical pattern improvement.
Performance deterioration across sectors needs repairing
Interestingly enough, it hasn’t just been Financials that have shown near-term deterioration. Sectors like Energy, Materials, and Industrials have also slipped over the last week.
This S&P Sector SPDR ETF chart showing performance ranked from worst to best on a 1-week basis shows the reasons for concern if this can’t be reversed quickly this week.
Industrials, Materials, Energy and Financials have dropped over 2% in the last week, with far heavier declines being seen in the latter two.
Consumer Discretionary loss in the last month has been sufficient to result in a -7.42% return in $XLY, the fourth largest of the major SPDR S&P Select ETF’s.
Technology has been the bright spot lately, as outperformance in Tech has largely shielded the market from a much bigger loss. However, if Tech stalls out in the short run, like I think is possible, then it’s imperative that other sectors come to the rescue to deliver performance.
Healthcare looks like a distinct possibility. Moreover, the downturn in the US Dollar could help Industrials and Materials rally. Yet these latter groups account for just a small percentage in SPX. A further bounce in Financials along in Healthcare would roughly account for Technology’s 27% influence within SPX (though shy by 3%) and help indices hold up if Tech begins to consolidate. Stay tuned.