Friday’s minor pullback seems to have occurred near a short-term timing pivot which might result in 2-3 days of weakness before turning price back higher. S&P and NASDAQ both lost more than 1% on the day, and pulling back to end near lows of the session could result in Monday also being weak.
Most of the underperformance occurred in sectors that had been outperforming the most thus far in 2023. However, Utilities remained one of the biggest laggards, dropping more than 2%, with XLU finishing at new multi-week lows. Thus, even on a pullback attempt, it remains difficult to find much strength in the defensive areas, which I view as positive.
Furthermore, the SPX wave structure (shown below) still argues that any near-term pullback likely proves short-lived and does not undercut 4000 (and might not even break 4100) before turning back higher into mid to late February.
Until/unless SPX 4000 is violated, I’m expecting that near-term weakness early next week will prove to be buyable yet again for a push back higher, which might last until February expiration.
See S&P Front month futures contract shown with Elliott diagram. This points to a grinding rally that’s expected to exceed 4200 without much trouble in the weeks ahead.
(Side note- Most of my week I had Bloomberg, CNBC and FOX Business on TV in the background during most trading days. Each network had anchors which seemed befuddled as to how or why the market was able to rally this week, and this included leading economists and also strategists. I take this as being yet another sign that the investing public remains quite confused about this rally. It seems our ability to rally in the stock market in absence of strong fundamental earnings or clarity on the endgame for Fed hikes is truly a mystery to most market participants who don’t study price action, momentum, breadth, sentiment and cycles. I view this as yet another key reason why it remains difficult for the market to peak out when seasonality, cycles and momentum combined with bearish sentiment remain so strong.)
Performance mean reversion is ongoing
As discussed in last month’s 2023 Technical Webinar outlook, most of this year’s early strength has been occurring in sectors which underperformed last year, namely Discretionary, Comm. Svcs, and REITS. Meanwhile Technology’s comeback has been strong enough to lift this sector to third place on the YTD list.
Defensive groups like Utilities, Staples, Healthcare and Energy have all been lagging this year, and even on a “down” day like today, Friday 2/3/23, Utilities proved to be one of the largest underperformers. That’s not typically too bearish.
Overall, I don’t see this changing immediately despite many of the leadership groups having gotten overbought. Meanwhile, the laggards such as Healthcare and Energy should be expected to bottom by Mid-February and start turning higher. I’m skeptical that we see much more weakness in either, and both look to be near investing support on recent weakness.
Energy’s break to new multi-month lows relative to S&P is a minor short-term negative only
Recent weakness has caused Energy to violate a one-year uptrend line vs. the Equal-weighted SP 500, (Using Invesco’s Equal-weighted Energy ETF, $RYE, vs. Equal-weighted S&P $RSP)
I feel this is a short-term negative, and means my recent comments about buying energy likely won’t materialize for another 1-2 weeks as this sector settles.
Crude oil looks to be nearing support near former lows, and I’m skeptical this falls much further given evidence of WTI Crude cycles bottoming in early to mid-February and turning higher into May. This gels with the normal period of bullish seasonality for Crude, and I like overweighting this group for those with a time horizon of 3-5 months or longer.
As shown below, the break of this one-year uptrend happened after a substantial period of outperformance following the breakout of the longer-term downtrend. However, the intermediate-term uptrend on this Energy rally remains intact.
Thus, I feel this is short-term weakness only and only those with very short-term timeframes might hold out for a better entry over the next 1-2 weeks.
Tesla’s Round-trip hasn’t done much to improve Technical structure
Following its nearly 50% drop after having broken trendline support, TSLA managed a near complete round trip on the weakness from Last November. Does this mean the lows are in?
That’s still a very difficult answer, as longer-term technical remain broken following the breakdown of its 2-year head and Shoulders pattern. Momentum has been quite strong on this rebound, but yet $TSLA never registered weekly exhaustion signals per DeMark indicators at the bottom. (There’s no saying this must happen before a stock bottoms out, but it normally provides a lot more conviction. )
Furthermore, the Tesla cycle composite seems to peak in February and drop into the month of May. Note, this is not what the broader stock market suggests in its own cycle composite. So, I expect TSLAs recent good fortune might not last in the months ahead.
As shown below, TSLA broke down out of a giant head and shoulders pattern and should face very strong resistance on a return to this area of former support between $205-$220 (Now strong overhead resistance) Given short-term overbought conditions after a huge rally while broader structure remains negative, it’s tough to say this stock won’t be a laggard in the months to come.
Therefore, I am not removing TSLA from my “Laggards” list. (As you know, this isn’t a list of names that’s constantly monitored and/or traded each day, and adjustments are made once a month. I am not making any adjustments with TSLA and the stock is nearing nosebleed territory based on near-term momentum while reaching a strong area of resistance. Thus, TSLA is not a great risk/reward for the months ahead, in my technical view.