Since the start of the year, the magnificent seven have led the stock market’s charge higher. Consider the following year-to-date gains for the magnificent seven: MSFT +31%, AAPL +32%, NVDA +192%, GOOG +46%, META +134%, AMZN +57%, and TSLA +74%. The “worst” return of the magnificent seven stocks, MSFT +31%, is more than double the S&P 500’s 14% return for the year to date. However, some of the magnificent seven stocks have been underperforming in the market recently.
As we highlight below, of the magnificent seven, only GOOG and AMZN have beaten the -4% performance for the S&P 500 over the last month. Such underperformance should be expected, given their rallies. Further, the Health Care and Energy sectors, which have underperformed this year, are showing signs of leadership. Such a rotation is healthy and talks to the improving breadth of the market. Gains are more likely to continue if a broad swath of stocks, not just the magnificent seven, are rising. This market rotation dance is commonplace. SimpleVisor provides tools, as we share below, to help track these rotations and the relative and absolute performance of the sectors and underlying stocks.
What To Watch Today
Earnings
Economy
Market Trading Update
During July, we repeatedly suggested a correction was needed to work off the short-term overbought condition of the broad market. To wit:
“We must remember that market advances can only go so far before an eventual correction occurs. My best guess is that if the markets are to reach all-time highs this year, we will likely have a correction to reset some of the more extreme overbought conditions, as shown below. Any pullback to the 50-DMA is likely a good entry point to increase exposure on a better risk/reward basis.” – Trading An Unstoppable Bull Market
The correction began the following week. Since then, the market took out initial support at the 50-DMA, our initial target, and is approaching the 100-DMA. In Friday morning’s pre-market commentary, I noted:
“While the market is oversold enough to bounce, the break of the 50-DMA has been decisive enough to suggest that the 100-DMA is the next logical support level. The MACD, as noted previously, is firmly entrenched in its ‘sell signal’ but is reaching levels that normally mark bottoms during bullish corrections. While I would expect a rally as soon as today, that rally will likely remain contained below the 50-DMA for now.“
As shown, while the market did end flat on Friday, it rallied pretty strongly from the opening lows. A further “relief rally” next week will be unsurprising, with the market still very oversold. Any failed test of the 50-DMA will be a reasonable point to reduce equity risk and rebalance portfolio allocations as needed.
The overall market momentum and sentiment remain bullish, and the correction, so far, has been very orderly. As long as nothing “breaks,” when this corrective cycle completes, we expect a rally into year-end. Such will be a function of performance chasing as portfolio managers play catch up into year-end.
The Week Ahead
New and Existing Home Sales for July, Durable Goods Orders, PMI Manufacturing/Services Surveys, and the University of Michigan Consumer Sentiment highlight this week’s economic data. Other than Jobless Claims, there will not be meaningful data on inflation or the job market. The week’s big event looks to be the Jackson Hole Economic Symposium on Thursday and Friday. Chair Powell (10 am ET Friday) and other Fed members will speak on the economy, inflation, and monetary policy. Thus far, little has been leaked about potential changes to its policy. Therefore, this year’s meeting might be uneventful. That said, it will likely shed light on whether or not they raise rates at the coming September Fed meeting.
Don’t Fret The 50-DMA Yet
For the first time in about four months, the S&P 500 is below its 50-DMA. Given how extended it was above its 50-DMA, a retracement back to the moving average is not unexpected. In fact, it’s healthy.
The graph below, courtesy of Ryan Detrick, shows that breaking the 50-DMA is often not a problem for bullish trends. Over the last 30-plus years, the S&P 500 was higher a month after breaking the 50-DMA eight of nine times. A year later, the index was also up eight times in the nine instances and produced a 14.1% gain.
The second chart shows the S&P 500 and its 20-,50-,100- and 200-DMAs. As shown, it is below the 20-and 50-DMAs. The next line of support is the 100-DMA at 4292. The 20-DMA may cross below the 50-DMA, which would be a bearish crossover, but at this point, it’s a warning, not a call to action. Despite trading below the 50-DMA moving average, the average is still rising. Further weakness, a 50- and 100-DMA bearish crossover, and breaks of the 100 and 200-DMA would likely change our sentiment.
SimpleVisor And The Market Rotation Dance
The graph below, from our SimpleVisor site, compares the path of relative and absolute scores for the energy (XLE) and technology (XLK) sectors over the last five weeks. Five weeks ago, both sector ETFs had positive absolute scores (X-axis) as the market was trending higher. However, XLE was underperforming the market, and XLK was outperforming, as shown by their relative scores (Y-axis). The “tails” on the graph below allow us to track the changing scores over time.
XLE is now the most overbought sector on a relative basis and still has a positive absolute score despite the market trending lower. Conversely, XLK has a negative absolute and relative score denoting it is underperforming the market and has bearish technical indicators. Less than a month ago, XLE was the sector with the most oversold relative score; today, it is the most overbought. Such highlights the tool’s ability to help us visualize and assess which sectors and stocks are likely to take market leadership and which are likely to cede it.
The following LINK to a prior article provides more information on the sector rotation tools available in SimpleVisor. You can try this tool and others on SimpleVisor with a 30-day free trial. If unsatisfied, cancel your subscription within the first 30 days, and you will not be charged.
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