Growth-Oriented Leadership Tries To Reemerge As Fed/China Concerns Wane

FED FLIPS AND CHINA DEAL LOOKING MORE LIKELY

The monthly chart below shows the performance of technology stocks (XLK) relative to the S&P 500 (SPY). After the 2016 U.S. presidential election, growth-oriented tech emerged as a clear market leader. Concerns about Fed policy and ongoing trade friction with China helped drive a shift toward more defensive sectors in Q4 2018 (see break of upward-sloping blue trendline). In February 2019, the Fed’s reversal on several key issues and more encouraging news from trade negotiations brought increased buying conviction to the tech sector. Tech stocks outpaced the S&P 500 by 3.55% in February and appear to be making an attempt at recapturing a market-leadership position (see break of downward-sloping orange trendline).

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Additional clarity on the Fed’s balance sheet (QT) game plan helped ignite a similar attempt at a bullish turn on the growth (IVW) vs. S&P 500 chart below. In February, growth stocks outperformed the market by 0.83%.

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LONGER-TERM STUDIES ALSO LEAVE BULLISH DOOR OPEN

This week’s stock market video provides updates to numerous studies (bullish and bearish) covered in recent months and provides some “what to look for” clues for both bulls and bears.

WEEKLY PERSPECTIVE ALSO ENCOURAGING

You can make an argument that last week’s outperformance by growth and tech stocks was based on increasing optimism that China and the United States could be close to resolving some of their major trade-related differences. On Sunday afternoon, The Wall Street Journal reported:

“China and the U.S. are in the final stage of completing a trade deal, with Beijing offering to lower tariffs and other restrictions on American farm, chemical, auto and other products and Washington considering removing most, if not all, sanctions levied against Chinese products since last year.”

Last week, growth stocks beat the S&P 500 by 0.56%. More defensive-oriented utilities (XLU) lagged by 0.32%; consumer staples lagged by 0.80%.

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Over the past five sessions, the technology sector outperformed by 0.53%, resulting in a better-looking weekly XLK vs. SPY chart.

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MORAL OF THE STORY

Technology and growth stocks significantly outperformed the market following the 2016 election; then lagged primarily due to Fed/China-related issues. It is possible these sectors are in the early stages of another period of leadership.

Until an agreement is formally in place, uncertainty remains on the US/China front, but recent market action speaks to favorable odds. On the Fed front, a full about-face has taken place. Therefore, it is possible the market’s two biggest concerns have been addressed sufficiently to allow a resumption of the prior growth-leadership trends.

Given an area of overhead resistance has not yet been cleared and lingering concerns remain about global growth, it is also possible the term “failed breakout” will be utilized in coming weeks. Any adjustments to our allocations will be based on the latest facts rather than a forecast of things that may or may not take place in the weeks ahead. If recent constructive shifts continue, the data may call for a reduction on the conservative side of the portfolio and ongoing additions to the growth side. All TBD.

Market Hovering Near Important Guideposts

2008 CASE

As shown in the 2008 case below, it is not uncommon for markets to come back and test the 200-day moving average during a bear market.

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HEALTHY MARKETS

Healthy and sustainable long-term trends tend to feature a high percentage of trading days that close above the 200-day (example below). Thus, the longer a market can stay above the 200-day in the early stages of a rally attempt, the higher the odds we are dealing with a new trend rather than a countertrend move that will be followed by lower lows.

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2019 CASE

The S&P 500 dropped 19% between the September high and the December low. Monday’s session was the S&P 500’s ninth consecutive close above the 200-day moving average.

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SIMILAR CASES

Dating back to 1950, if we look for S&P 500 cases that featured a 15-30% drop, followed by a push back above the 200-day, how did the market perform after closing above the 200-day for nine consecutive sessions? The answer is, from a longer-term historical perspective, quite well.

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POSSIBLE PLUNGE RESISTANCE

In 2019, the S&P 500 has rallied back to an area that may offer some resistance. The S&P 500 closed at 2,813.89 on November 7, 2018. Monday’s intraday high was 2,813.49. There is nothing magical about 2,813; just as there is nothing magical about the 200-day moving average. They are simply reference points. On the way down, price moved above and below the 200-day, but had trouble holding above 2,813, which means this area may be relevant on the way back up.

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A DIFFERENT PERSPECTIVE

This week’s stock market video highlights a rare dual setup involving Bollinger Bands and market breadth.

MEASURED APPROACH

There are numerous reasons to be optimistic about stocks. Over the past few weeks, we have seen noticeable improvement in the hard data tracked by the market model, including higher trend strength (TS) scores. However, the data, scores, and possible overhead resistance continue to align with a prudent and measured approach; something that is reflected in our portfolio mix. The longer the S&P 500 can hold above the 200-day, the more relevant it becomes. A sustained break above the S&P 500’s November 7, 2018 close (2,813.89) would also eliminate some short-term concerns.