A strong first half of the year until 2021 … what market breadth reveals the strength of the recent highs of S & P … which sectors our Strategic Trader experts like today
As I write on Friday morning, the S&P 500 has hit another record high.
The upward trend is due to June’s job report, which showed the economy created 850,000 jobs last month, slightly beating the forecast of 706,000.
Earlier this week, the S&P closed the first half of 2021 at an earlier record high, with official growth of 14.4% in the first two quarters.
Over the same period, the Dow rose 12.7% and the Nasdaq rose 12.5%.
These are fantastic returns given the ongoing pandemic, uneven economic reopening, partisan politics, and heavy sector rotation in the market.
But as always, the question arises: what’s next?
Will these new highs prove to be solid ground for further gains? Or will they prove to be a barrier that hinders return?
This is the question our technical experts John Jagerson and Wade Hansen addressed in their latest issue Strategic trader To update.
Regular Digest Readers know that we have responded a lot to ours over the past few months Strategic trader Team in our Friday editions. Your short- and medium-term technical indicators have helped us navigate a sometimes challenging, volatile year – despite the strong annual returns so far.
So, in today Digest, let’s see how John and Wade rate the strength of today’s market and its recent all-time highs … and based on where the market is headed from here.
Let’s jump in.
*** Are the new record highs stable?
For newer readers, John and Wade are the analysts behind it Strategic trader. This is InvestorPlace’s premier trading service that combines options, insightful technical and fundamental analysis, and market history to trade the markets in all possible conditions.
By doing Strategic trader Wednesday’s update provided a chance for John and Wade to see this week’s all-time highs. And it’s not quite as bullish as you might think.
From their update:
The S&P 500 hit another all-time high on Tuesday, closing at 4,291.80.
That’s good news, but it also obscures the fact that the width was very narrow.
A little less than half (227) of the stocks in the S&P 500 rose Tuesday.
Ordinarily, we wouldn’t be too concerned about this topic on a day when the index’s gains were relatively modest anyway. In this case, however, the losers were 11% larger than the winners.
This tells us that there are a minority of leaders pulling the index up.
To make sure we are all on the same page, “market breadth” simply refers to how many stocks participate in a particular move. For example, if the majority of stocks in the S&P are up on any given day, that is a sign of strong latitude, suggesting a consistent move up across the market.
But the S&P could go up if only a handful of big stocks climb. In the meantime, the majority of the smaller stocks could actually be trading lower. This would be an example of a rising market with no latitude, which suggests that profits are a bit meager.
As mentioned earlier, the S&P highs came with a narrow spread earlier this week. After taking this into account, John and Wade write that “the S&P 500 is not really at a record level at all”.
*** How to assess the state of the market breadth
Let’s go back to John and Wade:
A convenient way to look for this type of divergence is to use an ETF that tracks the S&P 500, like the SPDR S&P 500 ETF (SPY), and one that tracks the same index on an equally weighted basis, like the Invesco S&P 500 Equal Weight ETF (RSP).
What we would rather see is a period when the equilibrium index outperforms (or at least matches) the standard version.
In the graph below you can see the current divergence in width compared to the breakout in mid-March, when the weight average is doing much better. A wider width means that a breakout is more likely to produce significant gains.
Fig. 1 – Daily comparison chart of SPDR S&P 500 ETF (SPY) & Invesco S&P 500 Equal Weight ETF (RSP) – Chart source: TradingView
Fortunately, John and Wade tell us that this divergence is not necessarily bearish. Instead, it usually predicts volatility rather than larger declines. But it can offer glimpses of the future.
With that in mind, here are John and Wade:
This week the largest stocks in the index are making gains, but if they stumble in July the index will likely follow suit.
That means stocks like Microsoft (MSFT), Apple (AAPL), Tesla (TSLA), Facebook (FB), NVIDIA (NVDA) and JPMorgan (JPM) should better stay stable while we wait for the smaller index components to catch up .
*** A broad update since the Wednesday update
Markets are dynamic and can change quickly.
How has the market breadth increased since Strategic trader Update on Wednesday?
Below we look at the S&P 500 Index (in black) versus the S&P 500 Equal Weight Index (in green) over the last five trading sessions.
Note that the Equal Weight S&P index attempted to catch up with the weighted S&P yesterday, even though the afternoon rally stalled (circled) causing greater divergence.
As I write around noon on Friday, it seems like Equal Weight is about to push up, but we’ll see.
In any case, the divergence that John and Wade identified is still with us right now.
*** What do market fundamentals tell us beyond this breadth?
Back to Strategic trader To update:
The economic growth indicators remain positive. According to the Conference Board, consumer confidence is at a 16-month high and house prices are still higher, which supports homeowner spending.
We believe these factors give the market enough support to avoid serious losses while we wait to see what the final round of infrastructure spending talks bring.
Part of the reason John and Wade trusted here is because of the upward momentum in the transportation sector.
John and Wade in particular are focused on FedEx’s quarterly earnings last week, which showed many signs that economic activity is trending in a positive direction.
Back to John and Wade:
Although there were many operational concerns, FDX had total sales of $ 22.6 billion for the fiscal year ended May 31, compared to $ 17.4 billion in 2020.
This is important to us because transport and ship stocks have been reliable predictors of growth and expansion since the stock market began in the 19th century …
If we weigh the evidence as impartially as possible, the outlook for the market is positive for 1-3 months. We believe investors are waiting for the start of profitable season in two weeks for final confirmation.
If the big banks, tech, and retail companies are in line with the underlying performance we’ve seen from companies that reported early (FDX, NKE, PAYX, KMX), the breadth of the market will improve.
*** The sectors currently on John’s and Wade’s radar
Last week, ours Strategic trader Experts recommended that investors continue to favor leading sectors such as technology, real estate and consumer discretionary.
This has not changed. While wider breadth should create additional attractive investment opportunities, John and Wade don’t see a significant shift until we get more information based on the upcoming profitable season.
Here’s how they summarize their short-term trading approach:
Our strategy at this point is to continue to focus on that Market leader with the best income potential.
Although we have moved back into the tech sector more recently (new positions in AAPL and MSFT), we remain cautious about taking too much additional risk and we don’t expect our approach to change until the end of July.
Congratulations to everyone on a strong first half of 2021 and today’s fresh highs. Here’s what we hope the second half of the year will be even stronger.
Have a nice evening,