Domestic equity market proxies ended lower last week. Within the context of the SPX’s uptrend, large cap growth/technology/SPX’s short-term momentum has indeed started to churn. While once again acknowledging near-term headwinds, today’s report will focus on charts/commentary directly and indirectly relevant to our Smart Sector Strategies—domestic equities, international markets ex U.S., and fixed income. Additionally, I will discuss the “Big 9” and their importance in dictating the direction of the large cap growth/technology indices.
Smart Sector Strategies
U.S. Equity Strategy
The NDR Catastrophic Stop Loss Model, one of the risk management components of the strategy, still supports a fully invested position versus the S&P 500 benchmark. If the NDR model suggests a higher cash allocation, we will follow. We have an objective, unemotional plan to reduce exposure should conditions warrant.
Besides this week’s inflation report and the start to earnings season, there are four near-term headwinds with which the domestic equity market is contending: 1. Still-lofty bullish sentiment—Figure 1; 2. Short-term interest rates offer a reasonable alternative for the investment dollars of some, not all, investors; 3. Cycles (NDR S&P 500 Cycle Composite for 2023); 4. Negative momentum divergence—Figure 2.
RSI is a momentum oscillator that measures the speed and change of price movements. A bearish divergence, like now, forms when the index records a higher price high and RSI forms a lower high. When RSI does not confirm a new price high, it implies weakening momentum. RSI should not be confused with relative strength analysis (RS). RS measures the price movement of two separate proxies against each other to identify which is outperforming and which is underperforming.
Note: Mid-Cap and Small Cap proxies have recently successfully retested breakout levels and have been outperforming (mid-cap)/moving in-line with (small-cap) the SPX since June 1. This is their chance!
International Markets ex U.S. Strategy
Germany remains an “underweight.” NDR states, “The Ifo German business climate survey (a leading indicator of German economic activity) missed expectations, to a level consistent with recession risk. At the same time inflation remains way above the European Central Banks’s (ECB) 2% target. But Germany has among the highest unit labor cost growth.”
Within the context of the “Core and Explore” aspects of this strategy, South Korea and Poland were among some of the top-ranked “Explore” markets.
Fixed Income Strategy
The Fed paused in June but indicated more hikes later this year. Consequently, it was not stocks but interest rates that experienced pre- and post-Independence Day fireworks.
Floating rate notes typically outperform during a rising rate environment, according to NDR.
Magnificent 7, Elite 8, or the Big 9
By now, you would have had to be living under a rock to not have heard the commentary about the fill-in-the-blank number of stocks driving the Large Cap Growth/Technology/SPX indices higher thus far in 2023. These stocks have been called everything from the Magnificent 7 (AAPL, AMZN, MSFT, GOOGL, TSLA, NFLX, and META) to the Elite 8 (all previous, plus NVDA) and the Big 9 (all previous, plus AVGO).
Nonetheless, at the end of the day, there are near-term headwinds already in play. But when it comes to identifying the formation of potentially major downtrends (like what we saw in late 2021 early 2022) by Large Cap Growth (Technology), the S&P 500, and the NASDAQ Composite, we would expect to initially see a majority of these stocks roll over and start forming price patterns of lower peaks and lower troughs. Our view is, until that occurs, it is unlikely the indices will experience a major decline.
I created charts illustrating the topping process we saw in late 2021/early 2022. If you are interested, please reach out. I may also dive deeper into this analysis in my upcoming webinars. In the meantime, following the NYSE FANG+ Index may be more time efficient—see Figure 7.
NOTE: Relative to Figure 2 in last week’s report (7.5.23), there were issues with the verbiage. The correct verbiage is the following, which lines up with the charts shown in Figure 2:
Figure 2: Select Equal-Weight Domestic Equity Market Proxies – 1-Month Performance. | While they didn’t outperform their respective cap- or price-weighted index (mid-caps were the exception), equal-weight indices moved higher, in sync, with their cap-/price-weighted brethren. A continuation of this trend is needed as we move into 2H23.
Please let me know if you would like to schedule a call to go over the process and discipline underpinning our Smart Sector with Catastrophic Stop, Smart Sector International, and/or Smart Sector Fixed Income strategies.
Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies. Please let us know how we can further support you.
Art Huprich, CMT®
Chief Market Technician
Day Hagan Asset Management
—Written 07.10.2023. Chart source: Stockcharts.com unless otherwise noted.
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