Are Teflon Sectors Ready To Correct?

For many of the 12 months, I’ve been in search of the S&P 500 to shut above the 4200 stage. It has taken longer than I anticipated as on Friday, forward of the Memorial Day weekend, it closed at 4205. The weekend information concerning the deal to keep away from a debt default is promising however a vote is unlikely to happen till Wednesday. This will likely make merchants nervous early within the week because the invoice is prone to be criticized by either side.

One of many complaints concerning the market rally in April and Might has been the truth that giant tech had dominated the rally. Each the expansion/worth ratio evaluation, in addition to the relative efficiency evaluation, favored development ETFs just like the Invesco QQQ
QQQ
Belief (QQQ), iShares Russell 1000 Development (IWF
IWF
), Know-how Sector Choose (XLK
XLK
) and Communications Providers Sector (XLC
XLC
).

They had been all recognized as Teflon sectors on the finish of March. The two^nd quarter will not be over but however QQQ and XLK are up 8% or extra for the reason that finish of April versus only a 1% achieve within the Spyder Belief (SPY
PY

SPY
). All besides SPY closed final week above their weekly starc+ bands confirming they’re stretched on the upside. None are above the month-to-month starc+ bands which implies that they’ll nonetheless go larger however the odds of a pointy correction have elevated.

The QQQ closed at $348.40 and close to the higher boundary of the buying and selling channel. The weekly starc+ band subsequent week is at $353.89 with the March 2022 excessive at $371.83. There may be preliminary weekly help at $325 with the 20-week EMA rising sharply at $313.60 which is a bullish signal.

The mixed advance/decline evaluation has been optimistic for the market for the reason that October lows however there have been a number of durations of rotation. Subsequently the A/D strains have failed to keep up a sustainable development. The Zweig Breath Thrust (ZBT) sign on the finish of March offered additional affirmation because the prior sign in early 2019 led to large good points.

Nevertheless, there was rotation amongst the totally different A/D strains and the efficiency of the weekly Nasdaq 100 Advance/Decline line for the previous a number of weeks has been disappointing. It has proven little change over the previous two months because it has stayed above its WMA however beneath the March excessive.

The relative performance (RS) evaluation, which has been continuously featured, broke its downtrend in January. This confirmed the day by day RS evaluation that QQQ was a market chief. The weekly RS is performing very robust however can be prolonged on the upside as it’s properly above its rising WMA,

The QQQ closed properly above its day by day starc+ band with the day by day buying and selling channel within the $360 space, line a. It closed 5.6% above the 20-day EMA at $330.04. The June pivot, primarily based on information by means of 5/26 is at $337.69 with final Wednesday’s low at $329.56.

The day by day Nasdaq 100 A/D peaked in early February (line b) and has been unable to maneuver above that prime forming a bearish divergence. I anticipated to see higher A/D numbers as QQQ accelerated to the upside late final week. As a substitute, the help at line c was reached. The A/D line turned as much as shut above its WMA. This makes the motion early within the week extra essential.

An upside breakout within the A/D line continues to be doable and the day by day RS signifies that if the general market does right QQQ is prone to decline lower than the SPY.

Rates of interest moved larger final week according to the bottoming motion within the MACDs and MACD- His that was famous early within the month (see chart) The transfer within the 10 12 months T-Word yield above 3.65%, line a, confirmed the underside and makes a check of the three.85-4.00% space fairly possible.

There may be prone to be some stress on the bond market within the subsequent few weeks as the patron spending and PCE report advised inflation continues to be stubbornly excessive. There might be a surge in new issuance by the US Treasury within the subsequent few weeks. There may be additionally a packed financial calendar as forward of the roles report Friday, we get Shopper Confidence, Chicago Enterprise Barometer, and ISM manufacturing.

Although the market does look weak over the close to time period I’m nonetheless optimistic for the intermediate time period as I count on the general market to be larger later within the 12 months. I proceed to watch the worth sectors for any indicators they’re bottoming out.