The Invesco S&P 500 Equal Weight ETF (RSP) entered a “death cross” technical pattern during the January sell-off, but recent short-term technical indicators suggest the trend may be reversing in line with a more positive outlook for inflation.
History suggests that signs of a peak in inflation can create a good backdrop for equities. Markets don’t trade on whether conditions are good or bad, but rather on whether they are getting better or worse relative to expectations.
For the last two weeks, RSP has traded above its 20-day moving average, according to Y-Charts, signaling now could be an opportunity to buy in at a low price while the stock has upward momentum. After all, if inflation has peaked, equities are likely to benefit, potentially propelling major indexes out of death cross territory.
The death cross occurs when an index’s 50-day moving average crosses below its 200-day moving average. The simple moving average is an indicator of health for individual stocks and can be used to identify market trends and key price points. According to some investors, a healthy stock will consistently close above the 200-day moving average.
While it’s too soon to say today if inflation has peaked yet, April was the first month of the past eight months in which the year-over-year percent change in the Consumer Price Index was below that of the prior month — albeit barely, and it was still worse than expectations, Brian Levitt, global market strategist for Invesco, wrote in a recent insight.
Levitt said he sees a few reasons to take some solace: the bond market’s expectations of inflation have come down meaningfully in recent weeks, and the Fed’s preferred measure of inflation (core personal consumption expenditure) has begun to roll over on a year-over-year basis, average hourly earnings have been slowing, M2 money supply growth has been plunging, and retailers have reported ballooning inventories.
Investors looking to capitalize on the emerging opportunities should consider RSP or the Invesco ESG S&P 500 Equal Weight ETF (RSPE), which offers the same strategy with an ESG twist.
Opting for an equal-weight index, as opposed to a market cap-weighted approach, can provide diversification benefits and reduce concentration risk by weighting each constituent company equally so that a small group of companies does not have an outsized impact on the index.
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