In the Jan. 2, 2024 newsletter, “Breadth Expansion,” I wrote about how markets have historically experienced breadth increases that have historically led to strong long-term returns in stocks.
In my newsletter “Strong Price Action” on February 4, 2024, I wrote:
“The index is approaching the top of the channel, an area where the index has retreated in the past. Any weakness that may occur in the coming weeks is minor and there is no change in the long-term market upward trend. It is considered.”
When I wrote last month's newsletter, was nearing the top of its uptrend channel, but not there yet. Over the past month, the major market indexes have continued to rise, with the S&P 500 currently at the top of an uptrend (see chart below). This is an area where market weakness is expected in the short term. It's not a change in trend, it's just a short-term pullback of sorts.
Notice how the S&P 500 rose within the annotated uptrend channel. Below are my takeaways from the chart.
- Three times in the past, the index has approached the top of the channel, causing short-term declines (see the first three red squares).
- The index has risen significantly from its October 27th low. This rally has occurred without any major declines or declines, and we are now in an area where some short-term weakness is expected.
- Momentum is negatively diverged from price. This means that the index has been rising recently, but the momentum indicator (RSI) in the bottom panel is falling. This type of divergence often precedes an impending market downturn.
In summary, the market is doing well over the long term. However, we could see some weakness in the short term given that the major indexes are significantly overbought.
Sector rotation is the lifeblood of a bull market
Sector rotation is when investors and traders move money invested in stocks from one industry to another as they anticipate the next stage of the economic cycle. This type of market behavior indicates a bullish market environment.
Small-cap stocks have underperformed for years. Below is the graph of (). We can see that his IWM price in October 2023 is the same as his August 2018 price.
For the past two years, IWM has hovered between support and resistance (blue horizontal line). Note that the price just peaked above resistance last week. If the index can sustain above this resistance area, which is currently serving as support, it would be a strong signal of long-term bullishness for the overall stock market.
Strengths of new fields/industry groups
Biotech stocks have recently broken out of a bearish trend and are starting to show relative strength. Biotech stocks are a risk-on industry group, and if they continue to show strength, that would be a bullish sign for the broader market and provide a group of stocks to invest in that are not overbought and have more room to play. He will do it for you. Near future.
Below is a chart of the Biotechnology Index ETF (NYSE:). Notice that the index has just broken out of its downtrend. Also, the relative strength line in the bottom panel is breaking out and starting to rise (i.e., XBI is starting to outperform the (S&P 500 ETF)).
Another sector that has underperformed over the past year. But it is the energy sector that is starting to show early signs of strength.
The chart below shows the Energy Sector ETF (NYSE:) in the top panel and a relative strength chart (Energy relative to the S&P 500) in the bottom panel.
Notice how XLE broke out of the downtrend and broke above the resistance level.
conclusion
Long-term market technicals suggest that the stock market is strong. However, in the short term, the market is overbought and ripe for a pullback.
If sector rotation continues, it will signal a bullish market environment. Therefore, focus on the strength of sectors/industry groups that are underperforming, such as small caps, biotech, and energy stocks.
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Our conservative model invests almost the entire amount, and our aggressive model invests approximately 60% in stocks. If market technicals remain positive, I intend to add equity positions to my aggressive model.
