We continue to believe we are nearing the end of the “mixed market environment,” and the beginning of a new, broad-based bull market advance. With that said, we are still waiting for confirmation in the form of breakouts for small-caps (IWM) and Industrials (XLI) in order to turn bullish. Additionally, we would like to see MSCI China (MCHI) break above $74 resistance; this would be a major boon for risk sentiment.
- Semiconductors & Transports Breaking Out. The PHLX Semiconductor index (SOXX) and the equal-weighted Transportation Sector (XTN) are the latest cyclical areas to break out to new YTD closing highs. They join the list that includes Energy (XOP), Financials/banks (XLF, KRE), mid-caps (IJH), and equal-weighted Discretionary (RCD). Virtually all signs are pointing to a new broad-based bull market. That leaves the Russell 2000 small-caps (IWM) and Industrials (XLI) as the last two key areas that we would like to see break out to YTD highs, and we believe it will happen soon. Lastly, we would like to see MSCI China (MCHI) break above the key $74 resistance level; as long as it remains below $74 it will be a drag on overall risk sentiment… see chart below.
- Cyclicals vs. Defensives, Gold vs. S&P 500. Cap- and equal-weighted Discretionary vs. Staples ratios (XLY/XLP, RCD/RHS) continue to hit new highs, as has been the case for over a month. Additionally, the gold vs. S&P 500 ratio is hitting 16+ year lows. These are major risk-on signals.
- 10-Year Treasury Yield. The 10-year Treasury yield is testing logical resistance in the 1.69-1.76% range; we believe the 10-year yield will need to get above this range in order for value to outperform. As long as support around 1.40-1.45% holds we expect an eventual breakout above 1.76%.
- S&P 500. The S&P 500 remains bullish as it hit our 4600 initial target. Resistance remains at the solid red uptrend (see chart on page 5), which is currently 4620. As long as the S&P 500 remains above supports at 4545, the 50-day MA (4463), and 4430, we expect to see 4700 next (the blue dashed uptrend).
Source:FactSet
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