Breadth Thrust & Rotation
Premium Section: Setups in Small Caps (IWM), Industrials (XLI), Real Estate (XLRE), Germany (EWG) and India (INDA)
Last week there was a massive rotation in the market as investors took profit on large cap growth and rotated into small cap stocks. This caused a Breadth Thrust in the market as participation in the rally spiked.
Meanwhile, the old leaders (SMH, NVDA, MSFT, QQQ, ETC.) suddenly have relative weakness to the greater market. Fed Chair Powell’s comments to Congress caused interest rates to fall, driving a rotation into interest rate sensitive stocks (homebuilders, real estate, industrials, etc.)
The S&P 500 (SPY) continues higher above the 9 EMA. The aforementioned rotation will help prolong the rally. Looking at the chart below, notice the spikes in Net New Highs, the McClellan Breadth Oscillator and the Zweig Breadth Thrust indicator. These are all indications of widening breadth and that should provide an underlying strength to the market as we enter earnings season. Also notice the Global Liquidity (black line) spiked as breadth widens. Money is coming off the sidelines and into lagging parts of the market. On the negative side, the SPY had 5 Distribution Days in just over 6 weeks, so a break of trend could happen at any time. Furthermore, a resistance level is forming at $562 as RSI is in overbought territory.
The Intermarket picture shows that the 10-year Treasury Rate (TNX) is falling. This is driven by Fed Chair Powell’s dovish speak to Congress this week where he acknowledged the need to cut interest rates to support the economy. This was the fundamental catalyst that ignited the rotation to small caps in the market. The US Dollar (DXY) also fell as money is now flowing into the lagging parts of the market. As the TNX and DXY fall, it creates a supportive environment for risk assets and could be a tailwind for the rotation to continue.
Dumb Money is taking the ball and running with it as retail piles money back into the market. Smart Money continues to take profits and go on vacation.
On the positive side, Greed is slowly finding its way back into the market. If this can make it’s way back to Extreme Greed (red line), then this rally should have legs and a ways to go before it tops out.
In the Premium Section we’ll go over setups in Small Caps (IWM), Industrials (XLI), Real Estate (XLRE), Germany (EWG) and India (INDA).
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