Calm before the storm? SPX and most major indices seem to have stalled out to the downside ahead of Thursday’s CPI reading which is considered by many to be the most important economic report this week. Volume was compressed and Defensive groups like Utilities and Real Estate showed extreme underperformance, continuing a recent trend over the past week. Overall, as has been discussed, technical factors other than price argue that lows are close at hand. These are largely based on momentum, breadth, sentiment, seasonality, cycles and sector rotation. However, selling in Technology has kept a lid on strength in Equity indices, and the specific lack of any real rebound makes it difficult to have any conviction that trends are turning higher right away. Therefore the “proof is in the pudding” so to speak. Markets are certainly very close to turning up and could very well start this Thursday on a better than expected CPI reading.
However, one cannot rule out a “final” plunge down to near SPX-3500, but I anticipate any move should prove very short-lived and then reverse to rally back to 3800-50 in short order. Overall, the risk/reward definitely favors the Bulls between October-December, and while downside might be 80-100 points down, the upside seems to be 200-250 points higher in SPX. While I’m confident that markets will be higher over the next couple months, it’s important that we all see the proof of a reversal as the next few weeks are still expected to be volatile.
Industrials have begun to turn up sharply in recent days
While broader market indices have largely been churning at/near late September lows and increasingly many indices have fallen to new lows for 2022, not all groups have been selling off with the same velocity.
As discussed yesterday, Technology has cast a bit of a mirage over the “broader market” given its outsized influence, but has largely fallen twice as much over the past week as groups such as Energy, Healthcare, Industrials and Consumer Staples, all of which have outperformed Technology by over 400 basis points each over the rolling one-week period.
Industrials seems to have gotten an early jump on outperformance and outside of Staples has proven to be one of the better areas to consider for relative strength in this market. Stocks like $NOC, $LHX, $DE, $RHI, $CAT, $ODFL are all positive over the last week.
Weekly ratio charts of Invesco’s Equal-weighted Industrials ETF ($RGI) vs Equal-weighted SPX ETF ($RSP) show outperformance since late Spring 2022 but this rally has accelerated dramatically this past week. Some of this outperformance has come from Aerospace and Defensive, while Trucking and many multi-conglomerates have fared much better than SPX lately. Overall, I favor Industrials to outperform over the next two months vs. SPX.
Transportation has provided some strength, and this also looks encouraging
Don’t look now, but DJ Transportation Average is higher by more than 5% off the late September lows. This might come as a surprise to some who feel the market continues to move lower every day. Given leading tendencies of groups like Transports, this outperformance looks positive.
Stocks like ODFL and JBHT have begun to stabilize and show some strength, while the Airlines and Freight companies like $FDX have outperformed the SPX over the past week.
Technically this downtrend remains very much intact, and rallies will need to clear 13393 to have hopes of a bounce continuing higher. At present, this analysis is less about pointing out Transports or the broader Industrials as being technical buys for absolute returns. However, the relative outperformance is interesting, and stands out given such a lousy overall tape.
Utilities aren’t acting very “safe” Breakdown vs SPX looks troublesome
Interestingly enough, Utilities continue to be one of the worst parts of the US Stock market. Both XLU and $XLRE for REITS are lower by more than 7% over the last week, underperforming groups like Technology, and hitting multi-month lows in absolute terms.
Overall, $XLU looked to be nearing support nearly a week ago that had held multiple times since this past Spring. Unfortunately, this support was broken as of Tuesday’s session, and DeMark exhaustion still looks premature for Utilities.
Whether this underperformance can be related to consumers failing to pay their Electric bills, or just a consequence of higher interest rates, this breakdown in such a historically attractive area during a downturn is troublesome technically.
Relatively speaking the Invesco Equal-weighted Utilities ETF vs. the SPX has broken intermediate-term relative lows on weekly ratio charts going back since last year, and XLU has now given back nearly 50% of the 2020-2022 rally in a mere five weeks’ time.
While I forsee downside proving minimal given factors like oversold conditions and the fact that interest rates look close to rolling over, one cannot yet look to buy dips in XLU. The area at $60.85-$61 looks attractive for those attempting to buy dips. However, when evidence of counter-trend exhaustion begins to appear, this would represent a better time to consider owning this group on weakness. Attempts to favor Utilities here in absolute terms very well could work out on a larger US equity bounce. However, gains should be used for lightening up given the deterioration of the intermediate-term relative charts. Vs. SPX.
