It’s been a strong and much needed reprieve for small cap equities over the past 3-weeks, as the bulls once again stepped in at key support, reversing what looked to be the start of a significant breakdown. This nearly 9% rally has helped to ease the Russell’s 12-month losses to 7%, with the index remaining roughly 10% off its peak from last August and stubbornly flat over the past 18-months. So, the question we keep asking ourselves - are small caps finally poised to accelerate out of this lengthy consolidation and negate the potential top? The chart below would suggest that the kindling is ready to go, it just needs a spark. Unfortunately, that is where our questions begin to arise. A fair amount of the top-down charts in today’s piece leave us with many more questions than answers. That said, if the Russell can successfully recapture strong resistance in the 1605-20 level, we’d have to respect it.
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What follows is certainly not akin to the type of rest needed after, say…., creating the universe, but would it be so crazy to think that these stocks should rest, too? Please know that the trends for all of these stocks are virtually unassailable but, and you’ll see it in the lower panels for each chart, momentum readings are egregiously overbought and, in some instances, have crested. Is “rest” such a dirty word?
Plenty have been calling for the end of the bond bull market following their sharp sell-off over the past couple of weeks, but someone forgot to notify Utilities and REITs that the party was over. One would think that if yields were truly heading higher on a sustainable basis that two of the groups that have benefitted greatly from investor’s persistent thirst for yield would follow suit. As the chart below highlights (XLU vs. TLT), despite the violent reversal in bonds, bond surrogates have barely flinched in an absolute sense, consolidating near their respective highs as they burn off their internally overbought conditions. Surprisingly resilient given the supposed headwinds to say the least.
Our Saturday chart packet – “Ten Charts to Paradise” – was an homage to Eddie Money and today’s note – appropriately titled, “You Might Think” – is as an elegy, of sorts, for The Cars’ front man, Ric Ocasek, who died yesterday (9/15/19).
As an homage to Eddie Money (hence the title of today’s note), who died yesterday (9/13/19) at age 70, please take a look at the following 10 charts.
It was a few short weeks ago when US banks, in general, looked to be on the ropes as the KBW Bank Index declined to an 8-month low and was stuck below its downward-sloping 200-day moving average. We all know what’s happened since…Witnessing the momentum shape shifting suggests to us that, instead of trying to add to the growth vs. value maelstrom, we should re-focus on the best patterns we can find (New Regime for Financials or Counter-Trend Move?). US Bancorp (Technical Score = 4) fits the bill. Our market bellwether, JP Morgan (Technical Score = 4), also fits the bill but for today’s note USB is the subject. (We focused on JP Morgan in another note entitled, “The Belle of St. Mark”).
Trend followers by nature, needless to say the past few days have not been kind for momentum, as leadership groups viciously give way to longer-term laggards. One of the more pronounced examples is occurring within the Financials sector, where banks are benefitting relatively from the sharp pullback in FinTech. The question is, is this the start of a new regime of value leadership or just a painful correction within well defined trends? We lean towards the latter. Counter-trend moves are always the most painful, catching both bulls and bears offsides, but as the charts in today’s note reinforce – recent moves have done little to alter the trends in play. How these groups respond to their developing overbought (banks) and oversold (FinTech) conditions will be particularly telling for what awaits into year-end.
One of the conditional factors that we monitor for the broader market is how Consumer Discretionary is performing relative to Consumer Staples. As you can see in the chart below, this ratio (red line) has been steadily peeling off versus the S&P 500 (black line) for much of this year and remains stubbornly near cycle lows. As the market once again attempts to respond to the latest dose of trade news, a healing of this divergence would help alleviate our skepticism.
“When will growth (begin to) underperform value?” While there’s no good answer to this question – we asked the Delphi Oracle, just to be sure – it doesn’t stop us from thinking about it often. Because we believe the “value” component in the traditional Russell Growth / Russell Value representation is not really “value” (i.e., there’s a lot of non-value in the Russell Value Index), we put together a ratio for Growth Rel. to Non-Growth and show it, in the first chart, along with the Russell Growth Rel. to Russell Value ratio. The lower chart shows a momentum indicator for the Growth Rel. to Non-Growth version with its own potential Brobdingnagian BASE.
While having a growth bias has been more than beneficial for most sectors, it has been a persistent headwind for Health Care investors since last summer. Biotech, growth’s biggest weighing, is the key driver behind this underperformance and one look at the charts of IBB or XBI and it’s a fair bet that this sluggish price action will carry on. Amgen has exhibited signs of life, but we’d be very careful with Biogen, as the stock looks to be tracing out a meaningful top. On the other hand, Value’s biggest overweight is pharma and while we can debate the merits of individual charts within (i.e. JNJ, PFE), following a sustained period of underperformance the aggregate group looks to be turning versus the broader sector with Merck and Zoetis two of our favorites.
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