Spring Renewal, Same Range-bound Market

Q1 is coming to an end - will Q2 bloom additional stock market optimism?

Without question, the market has moved at an incredible pace off its December lows. The S&P 500 ETF $SPY is up 11.74% year to date, and despite brief waves of volatility, a majority of US sectors are participating in the rally. But what areas of the market are not joining the move higher? I believe Friday’s sell off, which resulted in the Russell 2000 ETF $IWM closing down -3.63%, aided in resurfacing the argument that a retest of the December lows is still a potential outcome. Given the performance of US stocks year to date, some technicians are framing a retest of all-time-highs as the easier softer way. In my opinion, stocks have been moving along a primrose path, ignoring some key charts signaling that market breadth really isn’t as widespread as some claim it to be. For instance, what is going on with Homebuilders? The below is a Weekly Chart of SPDR S&P Homebuilders ETF $XHB. I’ve mentioned this chart a lot in recent weeks, and the fact it has failed to trade above its 2007 highs is a red flag for me.

In 2007, Homebuilders were a leading indicator to the Financial Crisis. The below displays the Homebuilders price chart (top) next to the S&P 500 price chart (bottom) during the time leading up to the 2008 financial crisis. While the broad market made higher highs, Homebuilders made lower lows.

Regional banks $KRE was one of Friday’s biggest losers, closing down -4.34%. This is another sub-sector of the market I believe must trade above its $59 supply level for me to be bullish US stocks. The below is a Weekly chart of SPDR S&P Regional Banking ETF $KRE. A downward sloping 50 week moving average is trading right near this $59 resistance zone, emphasizing the importance of this inflection point.

Now, I wouldn’t say I’m bearish US stocks. I just want to reaffirm my opinion that we are trading within a range. Although we are above the 50 week moving average in all three major indices, I’m positioning myself to expect crossing moves the next 6-8 months. Safety sectors such as Utilities $XLU and Real Estate $XLRE continue to move upward, printing new all time weekly closing highs. I’ve remained bullish on Utilities all year, and expect this trend to continue into next quarter. This type of market environment is typically referred to as a “traders market”. The volatility swings can aid in capturing some pretty solid short term gains. But in my experience, it can also lead to over-trading. Sometimes sitting on your hands and keeping a healthy percentage of your portfolio in cash, is the superior move.

To close, I’d like to point out a few important levels I’m watching on the S&P 500 Daily Chart (below).

  • We closed the week Friday at the 2,800 level, a crucial support/resistance zone

  • Despite the sell-off Friday, we are still trading at support. If this retest passes, there isn’t much overhead supply between 2,800 and All-Time-Highs (2,940.91)

  • If 2,800 breaks, the 2 point short term trend line (black arrows) could play a factor. Roughly 40-50pts below I’ll be looking for increased demand

  • In my opinion, even if 2,800 breaks, we may not retest the December lows, but the 2,600 level would be an ideal exit for any short trade

Happy Spring - See you next month!