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SIA Weekly: Rotations in Technology, Real Estate, Healthcare, and Energy

Coming off a week of high volatility at the end of May, the first full week of trading in June has seen stock markets stabilize and the bulls regain their conviction. Two big developments at the end of last week have sparked renewed bullish sentiment; the easing of political tensions in Italy and Spain, and very strong US nonfarm payrolls, construction and manufacturing numbers. This week, a smaller than expected US trade deficit has provided additional evidence of a strong US economy and favorable environment for corporate earnings growth.

Market breadth remains positive. Although the Dow Industrials and S&P 500 remain stuck in broad sideways channels, upswings appear to be underway with the Dow regaining 25,000. The Russell 2000 continues to ascend to new heights and was joined this week by the NASDAQ 100 and NASDAQ Composite rallying to new all-time highs, another sign of positive bullish breadth.

Positive US economic reports have also solidified expectations of a US interest rate hike later this month and the potential for regular quarterly hikes to continue well into 2019. For now, however, investors enthusiasm about economic and earnings growth is enabling stocks to climb the wall of worry and shrug off concerns over trade war risks.

In this week’s issue of Equity Leaders Weekly, we start off with our monthly review of the Sector Scopes report and money flow between groups. We then follow with a closer look at the NASDAQ 100’s recent breakout.

Monthly Sector Scopes Update

The Daily Sector Scopes reports provide an excellent snapshot of which industry groups in the market are favored relative to others at a given point in time. Comparing two reports over time gives a strong indication of where capital is flowing within the market and if market conditions are normal or approaching extreme levels. This is achieved by comparing the Bullish Percent (percentage of stocks in a group on bullish Point and Figure technical signals) for 31 industry groups across all 11 market sectors.

The Sector Scopes report at the end of April was as close to a normal distribution as we are ever likely to see indicating capital and sentiment pretty much balanced across the spectrum. Over the course of May, a number of groups shifted to the right, indicating renewed bullishness. There are still no groups at the far-right hand side of the report, indicating a tone leaning more toward cautious optimism than the euphoric signs we saw at the start of this year before markets sold off. In other words, accumulation has resumed and the bulls appear to have room to run.

In terms of specific groups, technology has been getting love from investors once again with Computer Software, Computer Hardware and Internet clustering over toward the right side. On the other hand, interest sensitive groups remain vulnerable. The recent positive performance of Utilities faded over the last month, while Banks, Telecom and Insurance remain clustered over on the left-hand side. The one exception to this trend has been Real Estate which moved rightward but as we saw with Utilities, we may be seeing a short-lived trading bounce out of depressed conditions.

CBOE NASDAQ 100 Index (NDX.I)

Compared to the S&P 500, the NASDAQ 100 is narrower in scope with a higher weighting in the information technology and biotechnology sectors. The NASDAQ also has a higher relative weighting in momentum stocks and a smaller weighting in defensive stocks than other major US peers.

Because of this difference in weighting, the NASDAQ serves as a measure of investor enthusiasm (read greed) and willingness to embrace growth stocks. In some ways, the NASDAQ can be seen as the opposite of the VIX which has been called the Fear Index.

A massive advance that started in the second half of 2016 and carried through all of 2017 ran out of gas earlier this year. An initial correction morphed into a consolidation phase over the last few months, indicating that while the bulls were resting, they had not been defeated.

This week, the NASDAQ 100 has broken out to the upside once again, clearing 7,138 to reach a new all-time high and complete a bullish Spread Double Top pattern. This move indicates that the bears have been defeated for now and a new upleg has commenced with investors once again willing to take on risk and pay up for earnings growth potential.

A horizontal count from the recent congestion zone suggests that over time, resistance near 7,885 could potentially be tested although the 7,500 round number looms first. On the downside, the recently retaken 7,000 round number may become initial support with more possible near 6,792.

 

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For a more in-depth analysis on the relative strength of the equity markets, bonds, commodities, currencies, etc. or for more information on SIACharts.com, you can contact our sales and customer support at 1-877-668-1332 or at siateam@siacharts.com.

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