Weekly Macro Review – February 25th, 2024
Weekly Macro Review – February 25th, 2024
Charts That Matter
Markets were mixed again this week, but this time it was large caps $SPY $QQQ cranking out the gains led by the $NVDA earnings being received well. $IWM continued its bumpy ride as you can see in the chart below. I chose this closer look at the triple play daily chart this week to show the trend off the November lows. The large caps have clearly led and continue to do so, but there is nothing wrong with this trend and does not look extended. Instead, it looks like a grinding trend with mushy RSI along the way. A lot of doubt along the way which continues to be fuel. When we move over to the right and look at $IWM, even this one is still holding most of the gains and fighting off any larger pullback by riding the rising MA bands in the RSI bull range. This can change, but so far it’s not a bearish picture. We keep hearing about seasonality, but so far it is just muting things if having any current effect. Callum Thomas put out a good tweet on up years versus down years and how seasonality works. It showed most seasonally weak periods in up years are actually sideways to upwardly biased just like the year, but when its a down year, the magnitude of down years makes the weak seasonal periods much more negatively pronounced on average. So far, seasonality hasn’t had a big affect; let’s look back at the end of the quarter and it may give us a better picture into expectations for the rest of the year, but right now, it leans to the positive side no matter how I look at it.
One of the other big questions that keeps coming up is, are bonds sending a message that will affect stocks? This falls back on correlations and how they work, which isn’t always, but I think there are some messages coming from bonds soon that could play a role in the stock market’s performance. For a long time, stocks and bonds have been seen as having an inverse correlation. Actually, the $TLT led stocks and started rebounding in late fall before the stock indexes started responding but once they did, they follow off those lows. A lot of this has to do with the expectations for the FED to lower rates. But as the year ended, you can see the positive correlations started breaking down with all except the $IWM which are definitely more interest rate sensitive names in this environment. In our view, this has caused the pause in $IWM more than seasonality, but ultimately I still think the FED is likely to start cutting in May unless numbers just get ugly before then. All that is speculation. What we see currently is in the $TLT chart shows a decision time for the space. It closed the week strong after filling a gap on the daily and finding some support at a confluence level. On the weekly, you can clearly see how the volume profile looks as we are at the bottom of it. A move back to the top is most likely if we can see follow through this week. If not and the week closes under last week’s lows, it would severely damage the bull case for bonds higher and rates lower over the spring, which would damper the bull case in $IWM at a minimum if not the whole market. I think based on the outlook for the year and the current index chart setups in both equities and bonds, it has a decent chance of following through higher.
Power Universe
The Power Universe could not push forward on its breakout attempt this week as it moved sideways for the most part. Let’s go through each chart so see how things might have changed over the course of the week.
RSI continues to hold in the bull range and bouncing around just under the 60 zone. An expansion above it would likely help clear the breakout, but no telling when we might see that. For now, it is holding it’s own up near the highs.
Not much here but some back fill versus the large cap indexes. Higher lows remain intact on all so far.
Leaking breadth and weak breadth are two different animals, but don’t have the same affects on the markets. Leaking is when breadth weakens from a high level off initiation thrusts like we recently saw. We just went through a stage of leaking breadth that echoed more of what small caps and broader market equal weighted measures were doing, which is normal. None of these are outright weak or getting weaker at the moment. The bounce might not be robust and that is worth watching in the shorter term measures, but they are making higher lows for now.
This is where I come up with the not so robust idea on this current move off the lows for the Universe and $IWM names. However, we can’t ignore the new highs remain reasonable and the new lows are not expanding heavily on these liquidation days.
Relative Strength Rundown
Global Relative Strength
There was a large swath of international outperformance this week versus the US indexes. I did not spend a lot of time going through these this week, but it looks pretty diverse as far as those regions outperforming. Overall, the top RS rankings in the space didn’t see a lot of turnover for the week.
Intermarket and Size & Style
Intermarket view showed the $IWM moving back to the bottom of the equity stack that leads the list. As we discuss, as long as the equities are in the top half, we are happy. All in the top four isn’t that common and is great to see when it does happen like now. $TLT as discussed above is still in the bottom of this list, so no outperformance being seen, but it doesn’t have to outperform relatively as long as it can start making gains on an absolute basis, it will help out the equity complex in our view.
Size & Style remains very growth driven with Large and Mega Caps rotating back up top with this week’s performance. It is still all growth though, I would expect that at a minimum to start changing before we see a lot of weakness setting in equities in general.
Sector ETF by Size
These are provided for a quick overview for the macro investor to be able to see what sectors are performing and does size make a difference in the space or not. This week we are watching Communication Services closer due to the big spread between the rankings in this space on the different size levels. On the Cap weighted view, Communication Services is on top while it lurks at or near the bottom on the lower two lists. I assume the gap between the two sides will close one way or the other.
EW Sector RS Rankings
Our own equal weighted sector indexes also show Communications Services losing its leadership in recent weeks and putting in the worst performance for the week among all sectors. The four leaders all stayed put in their respective spots, but down in the lower half of the list, Energy and Materials showed the largest RS gains for the week. I mentioned Materials late in the week, and we covered Energy last week. This rotation could happen under the surface without putting much of a dent in any of the top sectors. Just profit taking in the largest Information Technology and Health Care names could fund gains in these two miniscule sectors for a much larger move than most might expect.
Wrap Up
The large caps move continued while the small caps continue to consolidate. Nothing in the internals or our universe that is showing any big deterioration, more large cap sprint with small names running in place like a cartoon that can’t get traction. I think it will, but no one can really time it. If the idea of a bullish year keeps the seasonality at bay, it could be sooner than later we get a clear breakout in the broader markets, but as we have seen in the past, small caps can really drag things out before they decide to make a directional move and our universe has a large contingent in that space. All of our relative strength equities gauges are still set up positively and offensively, so while we look for a potential reversal, so far nothing seems to stick. Let’s see how this week progresses and if it changes any of these views.
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As always, I hope this helps!
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