Market review 24.02.11
Looking under the hood
Hello everyone,
I started last week’s post showing the significant breakout in VT (Total World Stock ETF). We got excellent follow-through this week.
Despite broad ETFs hitting new highs each week, many market participants cite a lack of breadth (broad participation). In today’s post, I want to show that market internals give us much to be bullish about. I’ll begin with an overview, before getting into specific sectors in more detail.
Overview of market internals
What’s going on under the hood is indicative of a regular, healthy bull market:
The riskiest segments are outperforming (small tech, crypto, and junk bonds), while defensive sectors lag (low volatility & dividend funds, staples, and utilities). Specific Data:
Junk Bonds vs. Treasuries made new highs this week.
Bitcoin is back near 52-week highs.
XBI (biotech) saw one of the largest SCTR increases among all liquid ETFs this week.
Staples and utilities made new lows vs. the S&P 500.
Vital economic sectors are outperforming (retail, transports, infrastructure, home builders, and mortgage bonds), while inflationary sectors lag (energy, materials). Specific Data:
Commercial mortgage-backed bonds vs. Treasuries made new highs. This is a crucial development, given how dire the warnings for commercial real estate became.
XRT (retail) saw one of the largest SCTR increases among all liquid ETFs this week.
Financials & industrials are among the top 4 (out of 11) major US sectors by SCTR value, while energy and materials are among the bottom 4.
In recent years, rising inflation & interest rates have been a headwind for markets. With these forces abating, diverse parts of the market are entering uptrends and/or seeing increasing momentum.
Let’s look at individual sectors in detail now.
Technology
We know that this sector has been the leader for over a year. There are two vectors to discuss: cap size and the dominant AI theme.
Market cap-size:
Mega-cap tech has dominated in the past year (led by NVDA, META, MSFT, and AVGO), while smaller tech names have mostly been stuck in trading ranges. Within small tech, we’ve seen profitable companies outperform profitless ones.
With higher interest rates, this relative strength has made sense: mega-caps have large cash balances while small caps have heavy debt loads. The QQQ:WCLD ratio has been tightly correlated with Treasury yields for several years (link).
We could now be seeing a shift into small tech again.
Last week, I pointed out how small-tech ETFs saw a significant increase in their SCTR score – that continued again this week. At the same time, various small-tech ETFs such as WCLD and ARKW are coming out of low 2-year bases:
Aside: Given that monthly inflation data and Fed minutes come out next week, it was interesting to see WCLD significantly outperform QQQ this week despite Treasury yields climbing.
AI Theme:
In H1 2023, the leading subgroups within tech were semiconductors, hardware, big data, and cybersecurity. All are tied to the AI theme. After a healthy pause, we saw these groups regain leadership early this year. This leadership has only accelerated in the past two weeks as earnings season went into full swing.
Groups that have so far seen the largest post-earnings gains are Hardware (ARM, SMCI), Semiconductors (COHR, ON), Big Data (PLTR, CFLT), and Cybersecurity (NET, FTNT). Next week, we get further earning releases in Hardware (CDNS, ANET), Semis (LSCC), and Big Data (DDOG).
One chart I have regularly shared throughout the last year is the Arca Computer Hardware Index (HWI). It has been one of the cleanest charts in the tech space and clearly shows the two major tech breakouts in the past year: May and Dec.
Furthermore, the ratio of HWI to the Dow Software Index is forming a bullish 5-year base (link). If HWI included semiconductors, this ratio would have made a breakout long ago. This is interesting, given how long we’ve been hearing the narrative that “software is eating the world.”
I’ll end this section by noting that, like cybersecurity, biotech is another area that stands to benefit from AI. This week, XBI was one of the liquid ETFs with the highest gain in its SCTR score. Keep an eye on this space.
Consumer Discretionary
I’ll briefly discuss this is a wide-encompassing sector.
Like biotech, XRT (SPDR Retail ETF) was another liquid ETF with a big jump in its SCTR value. The weekly chart shows that XRT is on the verge of a significant breakout.
Homebuilders were one of the first segments of the market to bottom in 2022 and show leadership. This area remains among the strongest. And this week, XHB made a breakout from a tight flag:
Many companies in this sector report earnings next week, including CAR, MAR, MGM, ABNB, LYFT, SHOP, DASH, CART, and DKNG.
Financials
A lot is going on in this vital sector, and I want to recap it as follows:
In Dec, EUFN made a 6-year breakout to new highs, XLF made a 2-year breakout, and the Dow US Consumer Finance Index made a 3-year breakout to new highs. Next, I’d like to see IXG (Global Financials ETF) make a breakout:
Regional Banks have been messy. Still, KRE has made a series of lower lows & highs over the past year. Currently, it is resting on mid-BB support (link).
Earlier in today’s post, we looked at CMBS making a 2-year breakout relative to IEI. Given the dire narrative we kept hearing for Commercial Real Estate, this is a significant milestone. Next, I’d like to see the Dow US Mortgage Finance Index hold 5-year support in the remainder of this month:
Throughout Q4, we saw how fintech and blockchain were the leading groups in the market. Charts for AFRM, FOUR, ALLY, NU, and others are set up beautifully (link). Next week, we will get earnings releases from UPST, ZG, OPEN, COIN, and HOOD.
The release of monthly inflation data and Fed minutes next week could especially affect Financials, growth stocks, and the last area of today’s blog…
Energy & Materials
These are among the weakest of the 11 major US sectors.
While many stocks in the previously discussed sectors are in strong uptrends, several areas within materials are in strong downtrends. This is especially true for Rare Earths, Lithium, Chemicals (including Potash), and Precious Metals.
NTR and MOS (the largest producers of Potash/Fertilizer) recently made new breakdowns within strong multi-year downtrends:
XME and WOOD ETFs made failed breakouts (link). Meanwhile, COPX and GDX made major breakdowns relative to SPY (link).
Commodity-heavy Canada and Australia made fresh new lows relative to the US this week. Like many other global regions, EWA:SPY and EWC:SPY remain in strong downtrends that began over a decade ago (link).
Closing Notes
Global indices and sectors continue to make breakouts each week.
Internals are also consistent with a healthy bull market: The riskiest segments are outperforming while the most defensive sectors are underperforming. Areas vital to the economy are in uptrends, while many commodity-related segments are either in absolute or relative downtrends.
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Have a great rest of your weekend!
Cheers,
Brian G.
Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do your own due diligence.