Day Hagan Tech Talk: If You Are Willing To Listen…
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Summary
Depending on the relative strength ratios you follow (we have previously highlighted many), the broad market started participating/outperforming on November 13 (Figures 1 & 2). While this is supportive of equities, it also helped produce extreme bullish sentiment readings. This condition will likely persist into year-end. We will watch to see how this condition resolves as 2024 starts and we get past the first few weeks of new-year flows.
The Favored Few vs. Loveable Laggards
Years ago, Frank Teixeira, who ran the Technical Research team at Wellington Management (they also managed a mutual fund based strictly on technical analysis) and with whom I met several times, consistently stressed, “Markets give you a lot of information if you are willing to listen.” Over the past four to five weeks, analysts have made much of—and will closely scrutinize—the relative strength trends between capitalization-weighted (“Favored Few”) indices and equal-weighted (“Loveable Laggards”) indices.
Figure 1: Equal Weight vs. Capitalization Weight. | While more work is needed (see red horizontal resistance line), since interest rates peaked in late October and especially after interest rates broke down in mid-November, it looks like a trend change is taking place, favoring broader equity market participation—bullish.
JPM recently viewed Figure 1 from a different perspective, writing, “Risk markets continue to rally with equity markets seeing broad participation. Nearly 20% of the S&P 500 is at a new 52-week high, the highest share since May 2021… sign of this rally not just being fueled by the Mag 7.”
Figure 2: Select Equity Market Proxies Performance Since November 13. | If interest rates don’t spike higher again, there is more room for this relationship (broader market participation) to move higher.
Note #1: In lieu of a chart of the S&P 500, here are some ranges of support: 4637 to 4631 (March 2022 peak, intraday & closing), 4607 to 4588 (July 2023 peak, intraday & closing), and 4550 to 4537. Resistance: 4758 to 4819 (January 2022). 4796.56 (all-time closing high).
Note #2: The extreme bullish sentiment readings don’t represent a sell signal in themselves but depict a condition (many Wall Street participants have already bought). The sell signal, based on these sentiment readings, won’t occur until after they reverse direction and decline in earnest.
Other Charts of Note
Let’s turn our attention from the Regional Banking complex to the “big guys,” the Bank Index (BKX).
Figure 3: Bank Index and Bank Index vs. S&P 500. | Short-term, too far, too fast. However, from a non-trading, pure price perspective, I like what I see.
Figure 4: Renaissance IPO Index (bullish sentiment extreme, a different perspective). | With the lower quality parts of the equity market showing price strength, is the transition from a bearish chart configuration to a bullish chart configuration bearish (too much bullish optimism)? Or not?
Note #3: IPO is an ETF that tracks all U.S.-listed newly public companies for a period of two years before they are removed, per JPM. JPM also stated, and I would agree, “we are certainly not advocating exposure to this part of the market, but it would be helpful from a capital markets perspective if this activity started picking up after a quiet 2 years.”
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Art Huprich, CMT®
Chief Market Technician
Day Hagan Asset Management
—Written 12.17-18.2023. Chart source: Stockcharts.com unless otherwise noted.
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