Mid Week Macro 2/09/2022
The S&P is the first index to rally back into its MA bands. Last time, it got rejected off of the upper band and gapped down the following day. Follow through above the previous high will show increased demand and would mean that the index made a higher low.
QQQ is currently up 2.4% on the week and right at the lower MA band. RSI is reversing off of the 40 level after what was nearly 4 inside days. We saw QQQ settle down after the earnings reports from its largest weighting stocks. NVDA is the only major weighting to still have their earnings report.
IWM leads on the week with a gain of over 3% so far. After making a higher low, it is at the lower MA band for the first time since January 5th and is approaching the lower end of its previous consolidation. A strong finish to the week with increased demand at resistance will be something to watch for to end the week.
Power Universe and Breadth
The Power Universe index is pushing into the MA bands after a reversal from two long wicks two weeks ago. It has made one higher high and one higher low which is constructive to see from a breadth standpoint since the universe includes many stocks that the normal indices don’t. RSI reversed off of the 40 level. CFG and RSI both showed divergences while the Universe made a lower low.
Breadth has improved during this rally. New lows slowed before turning positive on Tuesday. The cumulative advance decline line has made a higher low and is improving. Moving Average breadth shows hundreds of stocks gaining their 20 day moving average. The MC Oscillator has turned positive. Breadth thrust has reversed nicely from the washout level seen two weeks ago.
Overall, the breadth picture is improving. A move out of near-term resistance on increasing breadth will increase the odds that the low is in.
We haven’t seen breadth this strong in a while. Broad participation is a key characteristic of a strong trend in either direction. We saw broad participation to the downside in January and now broad participation to the upside early this week.
this is a quote from the Weekly Sector Review video chart highlights, “It’s interesting to see Hotel, Restaurant, and Leisure outperforming all others. The re-opening theme will be something to monitor as last week’s price movements show it should be.” This continued on Tuesday as 66% of the sub-sector made new 10 day highs. The re-opening theme continues to get stronger as COVID cases drop and re-openings roll out.
Small over Large?
Last week we showed the potential breakout in the ratio chart of QQQ vs. IWM. That breakout failed as small-caps began to outperform. Continuation after the failed breakout would mean rotation into smaller names which plays into the broadening breadth perspective as there are many more small-caps than large-cap tech. IWM has underperformed QQQ for 49 weeks. We’re seeing some mean-reversion this week.
Rates are a hot topic as the FED claims to raise their targets. This is a year to date chart showing the percent change of the 5, 10, and 30 year yields. Because of the inverse relationship of rates and bond prices, holding bonds has not hedged stock weakness. The traditional 60/40 lost in both regards in January. That is why we believe relative strength is so crucial. We want to know what is performing and be on the right side of that trade.
Price action has been constructive this week. However, in the near-term the indices are at resistance levels where sellers stepped in last time. Breadth is improving on the rally. A breadth thrust through this resistance would be best case scenario and would likely propel stocks to test all time highs. Whatever happens, we will find the relative strength. Our goal is to assist you in your process. As always, hope it helps!