Upticks – May 2023

Update

April certainly brought about some surprises, and it’s no stretch to say investing has become a bit more difficult in the last month, despite S&P having risen five of the last eight weeks.  Violent sector rotation has wreaked havoc with positioning, but stock indices remain generally in good shape from a structural perspective, despite some recent slowdown, technically speaking.  April’s last few days of gains helped prices successfully log a positive return of nearly 2%, the best month since January, though trends heading into mid-May show prices largely at the same levels as mid-April nearly a month ago.  Overall, this remains a market where participants have been slow to embrace the rally, given ongoing concerns about the Fed’s plans to cease monetary tightening along with recession fears, earnings issues and ongoing wrangling regarding the Debt ceiling impasse.

Four factors suggest that the months ahead could prove far more difficult than bulls might expect, despite prices having shirked off most concerns, defying gravity since mid-March.  First, seasonality is turning more negative from May into October.  While October 2022 – April 2023 brought about the sweet spot for pre-election year performance, which largely went according to plan, this has now reached conclusion. May tends to have a negative performance record going back 90 years with an average return of (-0.20%.)   Second, sentiment has slowly but surely gotten more bullish in recent weeks, as might have been expected given the rally off of the March lows.  Polls like Investors Intelligence and Fear and Greed index have both shown markedly better readings over the last eight weeks since the mid-March lows. 

Third, sector rotation has proven important and meaningful over the last few months.  Over the last 30 days, four of the five leading Equal-weighted Sector ETF’s have been defensive in nature.  Technology’s bounce in April proved short-lived and this sector turned down sharply into late April.  While large-cap growth stocks like $AAPL, $MSFT, $META, $GOOGL certainly have carried the load in recent weeks, Equal-weighted Technology paints a more negative picture, as Equal-weighted Technology’s ETF has violated a lengthy uptrend vs. the S&P 500 in absolute terms.

The combination of Technology’s lagging performance and Regional Banks undergoing downward pressure has proven to be a difficult environment in which stock indices are unable to exert superior market breadth.  Healthcare has certainly come to the rescue in the short run, and this remains one of the best areas to position near-term in May through July, given historical seasonal tendencies.  However, it’s not incorrect to state that the broader market rally off the mid-March lows has certainly lacked the kind of breadth which would make the recent advance more inspiring in the eyes of many market participants who are paying attention.

Specifically, fewer stocks are now trading above their respective 50-day moving averages than was seen back in November or August of 2022.   Breadth concerns are now being joined by near-term boost in bullish sentiment and bearish seasonality to suggest that a 5-10% pullback might get underway starting in mid-to-late May into June or July.

The most likely scenario calls for a market peak in the period directly following May expiration which might lead Equities lower before a bottom and rally into the Fall.  Technology looks more vulnerable than a few months ago, with stocks like AAPL having rallied up to important resistance near former highs.  Financials, despite having rallied over the last month, have seen a meaningful divergence between Large-Cap Money center banks vs. Regional banks.  While a near-term oversold bounce is overdue for Regional Banks, it’s difficult to find this group attractive on an intermediate-term basis.  Any upcoming bounce in the Regional Banks is thought to prove short-lived. 

Interest rates and the US Dollar both look to have a negative technical trajectory for the month of May, but both could stabilize and start to turn higher as June gets underway, based on an upcoming reversal in my Cycle composites for both.  Furthermore, despite cyclical projections for Equities showing a much better year in 2023 than 2022, I don’t expect that gains will be linear and without consolidation. 

Style-wise, Growth has maintained its upward trajectory vs. Value, thanks to Large-cap Technology working well, while Energy and Financials have proven sub-par.  Small-caps and mid-caps have both struggled, meanwhile to match the performance of Large-caps, and the deterioration in Regional banks has certainly played a role in recent underperformance.  Bounces in Regional banks should help Small caps rally, but oversold rallies in this sub-industry could prove tactical until Fall 2023.

Overall, while a positive outlook appears proper for May, barring evidence of any technical deterioration, the risks appear to be growing.  Upside looks to be capped near SPX-4325 near last August’s peaks, but any advance above 4250 should be considered high risk for those with a shorter-term timeframe of 2-3 months.  $QQQ should face resistance near 328.

Methodology

• Relative strength vs. sector and index At/near 26-week and/or 52-week highs
• Positive momentum and/or Upward sloping moving averages on multiple timeframes
• Lack of DeMark exhaustion on daily, weekly, monthly and/or in combination based on TD Sequential and/or TD Combo indicators
• DeMark “TD 13 countdown Buys” utilizing TD Sequential and/or TD Combo indicators at/near lows on multiple timeframes
• Elliott-wave theory
• Positive momentum divergences (at/near lows for buy candidates), Lack of deterioration within its sector and at/near upper quartile of its annual range
• Above-average bullish bases for lengthy timeframes which might precede technical breakouts

Additions

Intuitive Surgical ($ISRG – $303.47)

$ISRG looks attractive at current levels following a big jump in momentum in recent months. This stock has been the 3rd best performing stock of any within the SPDR S&P Healthcare ETF ($XLV), with a return of +22.98% in data through 5/10/23. Its push last month to exceed former December 2022 peaks at $185 was thought to be bullish, and should allow for near-term upside to $326. (Additional upside resistance lies near late 2021 peaks at $369.69.) ISRG has begun to show attractive relative strength within the Healthcare sector at a time when Medical Devices stocks have shown marked technical improvement in recent weeks. Equipment stocks look more attractive than Biotechnology, and ISRG should likely be able to outperform in the months ahead given Healthcare’s seasonally strong performance which normally lasts through July. While weekly momentum has neared overbought levels, pullbacks should offer a chance to buy dips, with $285-$295 being a sweet spot for downside support in the weeks to come. Overall, momentum and technical structure remain positive, and ISRG looks attractive here technically.

MasterCard ($MA – $383.39)

MA’s recent progress in 2023 has helped to propel this stock to the top tier of performance over the last one, three and six-month periods (MA is in the top 10 performers out of all 73 names within XLF in each timeframe). This boost in relative strength is apparent on daily charts , which show the stock to have advanced to within striking distance of all-time highs. While many in the Regional bank space remain under pressure, the credit card companies within Financials look more attractive for long positioning, expecting outperformance.

Former all-time highs happened back in April of 2021, giving way to a lengthy period of consolidation. This took the form of a decline into October 2022, followed by a rally to within reach of all-time highs. Resistance should materialize at $400 initially, or around 5% higher from current levels. However, I believe this broad base should eventually give way to a push back to new all-time high territory given its increasing amount of tests since the initial peak was made just over two years ago. Momentum is nearing overbought levels, but remains positively sloped, and the ability to have recently surpassed late 2022 highs makes this an appealing technical risk/reward in the near-term within a sector that’s fallen out of favor in recent months. Overall, $MA looks attractive on a short-term basis technically and the act of climbing back above $400 would add to its intermediate-term appeal. Support on pullbacks should materialize near $370.

Deletions

Microsoft (MSFT – $295.40 – Price from 4/26/23 when this was officially removed)

Progressive (PGR – $133.86 – Price from 4/26/23 when PGR was officially removed)

Apple (AAPL- $167.45 – Price from 5/3/23 when AAPL was removed, write-up below)

$AAPL looks to be nearing strong overhead resistance, coinciding with several prior peaks from recent years.  Following a very strong run-up which has helped the stock gain more than 40% since early January 2023 lows, weekly momentum is now nearing overbought levels.  While the stock’s intermediate-term technical structure remains constructive, it looks unlikely that AAPL gets back above $176 right away, and a stalling out and possible trend reversal looks possible in late May into July of this year.  Moreover, DeMark based TD Sell Setups have materialized on weekly charts which normally can allow for consolidation following an advance, and daily DeMark counts using TD Sequential have the potential to materialize in 1-2 weeks.  Overall, given AAPL’s weight in SPX (7.3%) along with QQQ (12.5%), a stalling out in AAPL looks important as something which could produce a larger headwind to upward progress in the latter part of Q2.  Bottom line, it looks right to remove AAPL from UPTICKS, as the stock no longer appears like an attractive risk/reward at these levels. ($AAPL was officially removed in late April – This writeup is for information purposes only)

Sector Summary

Tickers

Sector Outlook

Energy’s rapid about-face in recent weeks casts some doubt on its ability to show outperformance during this seasonally positive time.  WTI Crude oil’s reversal back lower following its failed breakout attempt last month have put Energy’s gains on hold, and in need of immediate stabilization if Energy is going to strengthen in the back half of 2023.  Seasonality studies which had shown Crude oil and the Energy sector to be entering the best three-month stretch of the year, have proven disappointing, and have not helped to life Energy thus far.  In regards to structure, it’s still not wrong to say that intermediate-term relative charts of Equal-weighted Energy vs. Equal-weighted SPX have not violated important support from 2020 lows.  Overall, Energy has lost some of its technical attraction in the short run until/unless it can stabilize in short order.  Movement back above $85 would be helpful towards putting the Energy rally back on track at a time when demand shouldn’t wane as dramatically as what many investors are saying.   Key Energy names to focus on: $MPC, $LNG, $OXY, $HES, and $XOM.

Technically Preferred Stocks

Healthcare has begun to finally kick into gear at the start of a very seasonally bullish period for this sector.  May has proven to be the fifth best month of the year over the last 20 years for $XLV with average returns of +1.02%.  However, Healthcare’s dominance seems to normally extend through July, which along with November, stand out as the best two months of the last 15 years to own Healthcare (Both have average returns exceeding +2.4% over the last 15 years).

Interestingly enough, the ratio of Equal-weighted Healthcare to Equal-weighted SPX has in fact broken out of the recent consolidation pattern extending back over the last few years, and equal-weighted ratios of $RYH vs. $RSP have reached the highest levels since Spring 2021.  Sub-industry groups like Medical Devices, Biotechnology and Pharmaceuticals have begun to strengthen, and Healthcare remains the most appealing of the Defensive groups to consider overweighting at this time.  Favorite longs include $VRTX, $REGN, $UNH, $HUM, $BMY, $MRK, and $LLY.

Technically Preferred Stocks

Industrials remains technically attractive despite the minor weakness this group has shown over the last month.  On an Equal-weighted basis, RGI has still outperformed the Equal-weighted S&P 500 on a 1, 3 month and YTD basis.   Momentum remains positive on a weekly basis following the sector’s breakout to new yearly highs in relative strength vs the S&P 500.  Industrials has thrived given a decline in the US Dollar which might benefit companies with large overseas revenues, and a decline in the US Dollar looks to continue into June.   Overall, relative trends in Industrials vs. SPX have trended up for more than a year, and despite some minor consolidation, remain technically attractive.  I continue to think that Industrials should be overweighted, and expect outperformance in the back half of 2023.  Favorite stocks include: $TDG and $PWR

Technically Preferred Stocks

Following its dramatic recovery at a time when stock indices were struggling into March lows, Technology has begun to weaken over the last month, giving up over half of its gains since December 2022 lows. Relative charts of Equal-weighted Technology vs. Equal-weighted S&P 500 show a recent breakdown of the prior uptrend from late last year, which resulted in severe underperformance in the month of April. This largely stemmed from Semiconductor weakness. However, interestingly enough, many of the largest capitalization names within Tech, such as AAPL, MSFT, GOOGL, and META, were largely unaffected, and have thrived in recent weeks. It’s important to see this divergence, which has helped to keep SPX and QQQ in range-bound patterns, despite many sectors having begun to weaken in the last month. While Technology has still outperformed the S&P 500 on a 3-month basis and Year-to-Date on an Equal-weighted basis, it’s begun to lag performance over the last month. Importantly, many of the recent outperforming issues such as AAPL and MSFT are now nearing resistance, which should cause these stocks to stall out into late May. Until/unless broader Technology can regain some of its recent weakness, I suspect that Technology might lag performance between now and July. Overall, I still consider Technology an Overweight and technically attractive for 2023, but that near-term underperformance is possible over the next couple months.

Technically Preferred Stocks

Equal-weight- Consumer Discretionary has proven to be the best performing of any of the major 11 Equal-weighted Sectors over the last month and maintains its ranking of 3rd best of any sector on a Year-to-Date (YTD) basis. While the ratio of Consumer Discretionary vs. Consumer Staples has retreated a bit in recent weeks, the larger uptrend from last Fall remains intact. Homebuilders remain one of the best parts of Discretionary, while the Casinos, Cruise Liners, and Retailing stocks within the Auto industry are also quite constructive. As mentioned last month, the stalling out in various Retailing names has not proven important enough to result in this sector starting to deteriorate, and barring evidence of more serious technical damage, Consumer Discretionary could likely still outperform into June. While near-term overbought conditions could eventually result in Discretionary consolidating some of its recent gains, this appears early at the present time. Favorite longs include: $LEN.

Technically Preferred Stocks

Consumer Staples have shown the best performance of any of the Defensive sectors in the last month, and has outperformed all but two sectors (Discretionary and Industrials) over the past month. At current levels, the sector has pushed up to test former relative highs vs. S&P 500 which were made last Fall which is thought to be important. Thus, there stands a high likelihood of Staples stalling out at current levels, which could lead to consolidation into late May before further strength gets underway. While the recent strength is impressive during a time when stock index trends remain positive from March 2023 lows along with last October 2022, it doesn’t make Staples a group to favor in the short run and a Neutral stance looks technically correct. Similar to last month’s comments, for those seeking defensive exposure, Consumer Staples is more appealing than either Utilities, or REITS, but less attractive than Healthcare. Selectivity remains important for Staples. Favorite stocks include $MNST, $CASY, $DG, and $HSY.

Technically Preferred Stocks

Utilities remains range-bound in the short run, having traded in neutral consolidation since late March following the breakout of the downtrend from last Fall. Despite US Equities having bottomed in March, rallying five of the last eight weeks, Utilities have shown better relative strength than the S&P 500. In the last three months, Utilities remains just one sector which has shown positive performance along with Consumer Staples. While rates have pulled back given the twin threat of the upcoming Debt Ceiling discussion along with weakening inflation, Utilities have strengthened given a lack of risk appetite from investors. Movement back to new monthly highs relative to the S&P could result in temporary outperformance by Utilities during this seasonally weak time for Equities, yet the sector is not one to overweight for 2023. Favorite Utilities to buy/own: $CEG, $NEE, and $SRE.

Technically Preferred Stocks

Materials has slumped a bit since early March, but generally trends for this sector remain neutral since last summer, with numerous attempts at gains and losses both failing to get much traction. Daily ratio charts of Equal-weighted Materials vs. S&P show recent weakness having held the lows of its ongoing trend channel, and until this is violated in either direction, the trend looks neutral. Precious metals and mining stocks are one of the most attractive parts of Materials and minor weakness in this sub-industry should be considered attractive to buy dips technically speaking. Overall, a declining US Dollar and yields should still make commodities attractive, and Materials stocks stand to benefit on a push back down to monthly lows.  Bottom line, despite the ongoing consolidation, it seems right to favor owning weakness to the lower part of trendline support, while looking to shift out of this sector on rallies to recent highs.

Technically Preferred Stocks

Financials have shown only minor stabilization following the Regional bank crisis and this sector remains a Technical Underweight despite its weakness likely having stabilized temporarily near prior lows from 2020. This prior spring low provided initial support two months ago, and the sector continues to attempt to find its footing in recent weeks. Despite a big bounce in some of the Money Center banks like $JPM last month, most of the Regional banks remain under pressure and have shown only scant stabilization. Within Financials, the insurance stocks and exchanges have been strengthening over the last month, but brokers, and both regional and money center banks largely have been struggling. Interestingly though there does look to be a chance for Financials to bounce in the weeks to come. Specifically, counter-trend exhaustion indicators by DeMark show the possibility of a bounce in Regional banks based on the confluence of both daily and weekly TD Sequential “13 Countdown” signals having come to completion. However, this is thought to prove temporary, and not the start of a larger intermediate-term rally. Treasury yields still look to have an above-average chance of weakening in the weeks to come. Given the prospects of a weakening economy, Financials are not thought to represent the most attractive sector to overweight. Momentum remains negatively sloped and suggests this sector might face additional intermediate-term technical selling pressure.

Technically Preferred Stocks

The breakout attempt thus far in Communication Services, (Comm Svcs) largely looks to have stalled out following an unsuccessful push above March peaks. Despite the stellar performance in stocks like $META and $NFLX in recent months, the media space has underperformed sharply, and many stocks within Communication Services remain in intermediate-term downtrends. Until this sector can push back higher above March 2023 highs in relative strength vs. the Equal-weighted S&P 500, it looks right to leave Comm Svcs. as a technical Underweight. Near-term stocks like $TMUS are ones to overweight.

Technically Preferred Stocks

REITS have managed to bounce following the relative breakdown to new annual lows vs. Equal-weighted S&P 500. As shown above, following a very steep decline which undercut 2021 lows, REITS have successfully rallied back to recoup the area of its former breakdown. This does appear like a minor technical positive. However, this sector has not rallied sharply enough to argue for sustained recovery, and this rally is viewed as a short-term technical bounce only. Overall, it’s still right to consider REITS an underweight.  Preferred REITS to own include: $PSA, $EXR, and $IRM.

Technically Preferred Stocks

*please note: price data in write-ups is as of 5/10/23. Price data in tables is as of 5/11/23 close.