Weekly Macro Review

February 18, 2024

Markets finally found some challenge this week, at least on the large cap side closing down, but still posted inside weeks for both the $SPY $QQQ. Small Caps went on their own and closed the week with a decent gain. Let’s jump in and see how it played out and where it leaves us going into next week.

Charts That Matter

Looking at the weekly charts, the large and small divide ruled the week. It is interesting too that $IWM had the two largest gap down days and still came out the big winner for the week. $SPY retraced a lot of the early losses for the week by the end leaving a long tail. $QQQ barely came out with an inside week and gave up the most. You can see the CFG on the bottom of both $SPY $QQQ is diverging (without RSI doing the same), hinting to be on alert for this to build into a shorter term pullback in these spaces. I start with thinking short term because both of these are still currently in strong RSI bull ranges and on Nitrous. I don’t expect an outright collapse directly from readings like this. At the same time, $IWM held the recent breakout on volume this week with a significant tail of its own. This may be trying to tell us with the concentration so heavy on the big cap indexes, we could see them correct and still have plenty of setups under the surface.

Stepping down to the daily battle, after the gap down on Tuesday, we see the caps were quickly closed by Thursday, but could not hold those gains into the long weekend. $QQQ taking the brunt of the weekly total with a weaker bounce and stronger red candle on Friday. Divergences in the larger two here as well, and could be time for a trip to the MA bands, but there is still some fight in the buyers. We will see how they feel after the long weekend. Diverging in strong RSI bull ranges is another more short term caution at this point. Small caps are on the opposite side, attempting to clear the 60 level on RSI as it breaks out on the price chart. $IWM has a lot more fight in it on this attempt than we have seen in a while, but sellers are still hitting the little guys any chance they get. If this breakout holds, many of those sellers could turn into buyers as the big range is finally put behind us.

The 65 minute intraday view shows the internal battles this week. $QQQ was the weakest for most of the action and looks most vulnerable going into next week. The potential RSI failure swing did survive Friday, as PPI tanked the futures and left this looking rough. However, it is still in the RSI bull range, so we would need to see RSI fall below 40 on Tuesday to confirm, and any move back above the 60 level would negate the swing and likely put this leg higher back in gear. No need to anticipate, it will tell us. I want to see how the week starts, because I don’t want to read too much into the late day selloff on OpEx Friday. These charts, like the others, may be showing some cracks, but are all still in RSI bull ranges and need to be respected until we start seeing the 40 levels crack. A peak under the 60 level is a heads up, but not a complete message.

Power Universe

Power Universe equal weight index continues to shape up well and show improvements from a broad market perspective.

When we look at our Power Universe, it closed at new highs this week even with the small giveback on Friday. This comes after the recent consolidation or digestion on top of the previous larger breakout. During this sideways digestion, the RSI has muddled between 50 and 60 in a RSI bull range established in November and hasn’t really been challenged since. CFG continues to make higher lows. Any continuation in price on the current breakout should send RSI above 60 again and above this current RSI range.

 

One way I use relative comparative charts on the universe are to see when it it it starts outperforming the $SPY and $QQQ. This is a good sign things are broadening out and not deteriorating with headline index prices. We are potentially seeing it again now after making higher lows after the late 2023 surge in the ratios. 

Breadth picture looks fine for the type of price action we are seeing. Yes, it is diverging from the overly concentrated $SPY $QQQ, but not so much when we look at the bigger picture. While we are seeing readings like the %>50sma leak back down to the 50% level during the digestion, it is currently stabilizing and trying to turn up. The McClellan Summation Index is turning higher and had put in a signal this week. The AdvDec Line is making new highs by a smidge and all the short term breadth measures are improving as price breaks out.

The highs and lows charts shows the hit was abrupt early week, but buyers came right back in and bought the drop. That is all we can ask for at this stage. It was also nice to see the muted reaction on the 63 day reading; no real concern there.

Relative Strength Rundown

Global Relative Strength

The US big caps stay in the top quartile this week barely. Here we have three different views to see where leadership is globally. $EPU on all three lists here, but might be kind of thin for many. Some others that might be worth a look were: $EDEN $EWO $EIDO $EWJ

Intermarket and Size & Style

Even with the minor weakness for the week, equities remained at the top of the list with a small intrusion from $USO which made its way up to 87 RS score with a strong week. Another standout on the week was $SLV, reversing back higher at the bottom of the recent range. It is too early to tell if it is anything more than just another run back to the top of the range it has been in for a year. $UUP hanging out in the middle not taking a side just yet moving its way back into the middle of its own range.

Size and Style is holding the growth stance well while seeing Small Cap growth move to the top while Mega Caps dropped two slots. This shift has potentially important implications, but so does the fact that value is not what is coming on and taking the lead as the current leaders take a break. Don’t ignore this, it tells you a lot about the rotation and the health of the rally.

Sector ETF by Size

On the sector level, there is still plenty of green for the week on all levels, just not in Technology which carries so much weight these days. Energy, which carries almost no weight in the major indexes, was your weekly leader along with Materials. Both running away from the pack with Materials even outperforming Energy on the small cap level. There was some rotation into Defensive sectors like Consumer Staples, Utilities and Real Estate, but so far it is not enough to move the relative strength needle versus the rest of the sectors.

EW Sector RS Rankings

With the Equal weight sectors, we still have a very offensive type leadership, but also a big relative and absolute price move for Energy this week off the bottom of the list. Health Care performed again and Materials slide in here as well. It is notable that Health Care outperformed more in our EW sector than in the ETFs above. Maybe some big, lesser known names moving under the surface. Biotechnology continues to be a large and very active subsector for us. 

Wrap Up

The markets look to be rotating slowly out of the Mega Cap names and into a broad swath of other areas. This would be the type of rotation that not only affects sectors, but also size and style type investors. This helps continually narrow the fishing lanes for where there is the most opportunity to rotate or deploy new capital. There is a lot of rhetoric around seasonality, ours included, but that information is a backdrop, not a decision maker. Price action should lead decisions, and the best we have right now is the largest names that have run the hardest are starting to wobble a bit. And that money is currently broadening out and moving down the ladder. Recency bias has us thinking if the Mega Caps are not leading the markets are going to go down. That might be true with the most market weighted indexes (which is what many gauge by), but doesn’t have to be that way these days with all the weapons we have with ETFs and individual company access.

You can find many of these and other charts throughout the power-investing.com site and through our Stocktwits and Twitter feeds @gtlackey and @power1nvesting.com. Anything mentioned is for education purposes only and not meant to be recommendations to buy or sell any securities. Please see the full disclosure in the footer for more information.

As always, I hope this helps!