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Timing Models – Large-caps Extend Lead, Small-Caps Lag, Utes and REITs Lead, IWO hits Moment of truth (Premium)

Large-caps and large-cap techs ripped higher the last five-six weeks with SPY and QQQ hitting new highs. The Technology SPDR and Consumer Discretionary SPDR are leading the charge among the sectors with 13+ percent gains. Keep in mind that Amazon accounts for 23.5% of XLY and Tesla accounts for 14.45%. These two are not exactly pure plays in the Consumer Discretionary sector. The chart below shows sector performance since SPY bottomed in early March and there are two surprises: the Utilities SPDR and Real Estate SPDR.

XLU and XLRE are the third and fourth best performing sectors with 10+ percent gains. I do not think this reflects a rotation out of offensive sectors and into defensive sectors because the other offensive sector show strong gains (XLI, XLC). XLF is lagging with a 3% gain. The move into Utes and REITs shows demand for yield. Also keep in mind that XLU accounts for 2.65% of the S&P 500 and XLRE accounts for just 2.45%. These are really small sectors and it does not take much to move them.

Report Summary

  • SPY: long-term uptrend and short-term uptrend (leading).
  • QQQ: long-term uptrend and short-term uptrend (leading).
  • IWM: long-term uptrend and short-term uptrend (lagging).
  • Composite Breadth Model: bullish since May 29th (bull market).
  • TLT looks poised for an oversold bounce (falling knife!)
  • Dollar turns down as Euro turns up.
  • The Fed Balance sheet expanded and hit another new high.
  • Yield spreads are low and show no signs of stress in the credit markets. ¬†

New Highs for SPY and QQQ

The S&P 500 SPDR (SPY) and Nasdaq 100 ETF (QQQ) notched new highs this week. This shows broad strength in large-cap stocks and strength in large-cap techs. The only caveat is that both are up around 10% in the last five to six weeks and getting a bit extended short-term. This is not bearish. It just means that we should not be surprised to see a rest or corrective period soon. Also note that IWM is lagging and well below its mid March high. This consolidation (blue zone) is still viewed as a corrective period after a massive advance (+60% from late October to mid February).

IWM Maintains Upswing

Short-term, SPY and QQQ followed through on their flag breakouts and are at new highs. Both are in the trend-monitoring phase, which means there are no active setups. The bull flags were the last setups and the flag breakouts were the last signals. The blue lines mark the upswing for IWM with support marked at 221. There is no setup here, but the reward-risk ratio is good for long positions. A break of 221 would be negative and could lead to a test of the January-February lows.

Watch Small Cap Growth for Clues

The Russell 2000 Growth ETF (IWO) is the main laggard within IWM. Nevertheless, this chart sports bullish setups on two timeframes. Long-term, the trend is clearly up because IWO is well above the rising 200-day. The bar chart shows a triangle forming as the ETF retraced 33-50% of its prior advance. A triangle after an advance is a bullish continuation pattern and IWO is making a breakout attempt. Short-term, the candlestick chart shows a mini breakout, a pennant and a pennant breakout. The pennant lows mark first support and a break here would negate the pennant breakout. This would also put price back into the triangle. And finally, notice how RSI turned back at the 50-55 area in mid September and mid March. A break above 55 would signal a momentum breakout.

Composite Breadth Model: Bull Market

The Composite Breadth Model defines the market regime and remains in bull market mode with all five inputs bullish.

Over 90% of S&P 500 stocks are above their 50, 100, 150 and 200 day SMAs. Over 90% of S&P 1500 stocks are above their 150 and 200 day SMAs. Less than 80% of S&P 1500 stocks are above their 50 and 20 day SMAs and this shows less strength in small-caps and mid-caps. We can also see this when comparing SPY and IWM on the price charts.

The model and indicator charts can be found on the Market Regime page [1]. These include the Thrust Models for the S&P 500 and S&P 1500, and the Trend Models for these indexes. Declines and consolidations for the major index ETFs are considered corrections within the bigger uptrend as long as the Composite Breadth Model is net bullish. Note that this model is designed to absorb corrections and not turn bearish until the weight of the evidence is bearish.

You can learn more about the methodology and
historical performance for these breadth models in this article. [2]

TLT Poised for Oversold Bounce

The 20+ Yr Treasury Bond ETF (TLT) is getting an oversold bounce off a reversal zone and the 10-yr Yield is back at the low end of its prior eight year range. The chart below shows TLT, 14-week RSI and the 10-yr yield. The gold shading shows when RSI dips below 31 and becomes oversold. I am using 31 so readings just above 30, such as 30.3, count. We can see that oversold conditions line up pretty good with bounces in TLT. An exception was 2013 because TLT hit a new low in January 2014 and then bounced. Also notice that TLT is bouncing off a reversal zone marked by the 50-67% retracements and support from the Nov-Dec 2019 lows (blue shading).

The bottom window shows the 10-yr Yield with an eight year range from 2012 to 2019 (blue shading). The yield plunged to new lows when covid fears hit the market in March 2020. After stabilizing for a few months, the yield moved back to the lower end of the prior range. Thus, yields are just getting back to normal, just like the rest of us. I am not going to call this resistance for yields and I am not interested in catching a falling knife in TLT. Instead, I will watch closely and perhaps look to enter should TLT test mid March low on a pullback (better reward-risk ratio).

Dollar and Euro Poised to Resume Bigger Trends

The bottom window shows the 10-yr Yield with an eight year range from 2012 to 2019 (blue shading). The yield plunged to new lows when covid fears hit the market in March 2020. After stabilizing for a few months, the yield moved back to the lower end of the prior range. Thus, yields are just getting back to normal, just like the rest of us. I am not going to call this resistance for yields and I am not interested in catching a falling knife in TLT. Instead, I will watch closely and perhaps look to enter should TLT test mid March low on a pullback (better reward-risk ratio).

Yield Spreads and Fed Balance Sheet

Investment grade yield spreads are at very low levels and they narrowed again this week (mid April). The AAA yield spread is at its lowest level in over 10 years and shows no signs of stress in high-end investment grade bonds. The BBB yield spread also narrowed further and hit a multi-year low. This shows confidence in low-end investment grade bonds.

The BBB yield spread is the difference between the yield on BBB corporate bonds and US Treasury bonds. BBB bonds are the lowest rated investment grade bonds. A low and/or narrowing spread (falling) shows increasing confidence in the credit markets, while a high and/or widening spread (rising) shows increasing stress.

Junk and CCC bond spreads narrowed from late September to early April and hit multi-year lows last week. Both edged up a little this past week, but remain at very low levels.  There are no signs of stress in the lowest grade bonds (junk) and this is net positive for stocks.

The CCC spread is the yield difference between CCC corporate bonds and US Treasuries. CCC bonds are the lowest rated junk bonds (riskiest). A low and/or narrowing spread (falling) shows increasing confidence in low quality bonds, while a high and/or widening spread (rising) shows increasing stress.

The Fed’s balance sheet expanded by $84 billion this past week. There have been five expansions of $50 billion or more since December (one per month) and the balance sheet hit a new high this week. $8 trillion is within spitting distance so maybe they will start making some hats (like Dow 40,000). Overall, the balance sheet has been expanding since mid July.

Thanks for tuning in and have a great day!