Day Hagan Tech Talk: Fine and Good, But What About Now?
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Summary
It was helpful getting on the right side of our benchmark, the S&P 500 (SPX), in mid-October/November 2022, noticing the relative strength shift to Growth in late January, the start of price stability and basing by the Bank complex and the recent uptick by Small Caps. But that is in the past. What about June, the upcoming end of the first six months of 2023, and the back half of the year?
Will the Love Spread?
Domestic equity markets experienced an improvement in upside participation last week due to sector rotation. Small Caps, Mid-Caps & DJIA outperformed the SPX, NASDAQ & NDX 100. Underperforming sectors year-to-date (Financial, Materials, Industrials, Real Estate, Health Care) all outperformed the SPX last week – sector rotation, of which a continuation is needed. Even the Energy sector rallied, though it underperformed the SPX. The S&P 500 Equal Weight Index was flat versus the large-cap weighted SPX, and a micro-cap proxy outperformed the NYSE Fang Plus Index.
Now What? Various short-term sentiment readings have reached “excessive optimism” levels, historically a headwind, yet the NDR Cycle Composite for 2023 suggests equity markets have a tailwind into July/mid-July - Cycle composites are second-tier inputs, i.e., they provide background information but are not part of our models. Within that context, besides taking our cue from the NDR Catastrophic Stop Loss Model, here are a few non-consensus guideposts I am following in order to discern whether a continued improvement in internal equity market readings occurs and whether the rally extends or not:
Dow Jones Industrial Average (DJIA) and Dow Jones Transportation Average (TRAN): For discerning rotation towards cyclical/non-growth. Figure 1.
Banks (large and regional): To aid in gaging rotation towards Value/Non-Growth. Figure 2.
Small Caps/ Small Cap proxy: To help in recognizing rotation towards economic/Fed sensitive, risk-on parts of the equity market. The Russell 2000/1000 relative strength line is fighting to stay above support from the 2020 lows. Given how volatile this complex is, please reach out for the most current price chart, relative strength chart, and/or A/D Line.
Volume-adjusted Supply versus Volume-adjusted Demand: Another way to gauge equity market strength. For the first time since early February, the indicator is approaching a buy signal, which would confirm that demand is outpacing supply. Don Hagan stated, “This is a prerequisite for the cyclical up move to continue. Specifically, volume demand is becoming more supportive, but not on a buy signal yet.” Please reach out for a chart.
Bottom Line: We need more rotation into the laggards - further improvement by internal equity market breadth/participation because “following historical periods of narrow leadership, S&P 500 returns have been below average,” per NDR. Alternatively, a broadening rally that includes small caps and financials would increase the odds of the rally continuing deep(er) into the second half of 2023.
Figure 1: DJIA and TRAN. | I want to see the red resistance lines decisively broken and held! Also, I don’t want to see the green support lines violated, especially given the narrow backdrop.
Figure 2: Regional Bank Index and Bank Index. | Please refer to the verbiage and levels shown in the charts. Also, reach out for additional details.
Figure 3: S&P 500 with flattening 200-day MA (blue line). | Now that the August downside gap was filled, the August intraday and closing highs (4300 +/-) represent resistance. We are there! Now the upside gap from last week (green circle between 4241 and 4232) represents “first support.” I wouldn’t be surprised to see gap support tested. If “gap support” is violated, the odds would then favor a retest of secondary and more critical short-term support, in and around 4100.
Side Note: “It's a very light week for economic indicators. In addition, the Federal Open Mouth Committee will be silent until its blackout period ends after the FOMC meets on June 14 and 15. On the other hand, now that the debt ceiling deal was signed into law Saturday by President Joe Biden, the US Treasury will flood the fixed income markets with lots of securities to refill its checking account this week.” (Yardeni Research, bold emphasis by author)
The Day Hagan/Ned Davis Research Smart Sector strategies utilize measures of price, valuation, economic trends, monetary liquidity, and market sentiment to make objective, unemotional, rational decisions about how much capital to place at risk, as well as where to place that capital. Please reach out for specifics.
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Art Huprich, CMT®
Chief Market Technician
Day Hagan Asset Management
—Written 6.05.2023. Chart and table source: Stockcharts.com unless otherwise noted.
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