Momentum Memo: Biggest Shift Into Lagging Value Sectors In Friday Breakout

Introduction

This text builds on prior sign occasion articles with extra explanations on methods to profit from one of the vital in style options of the Worth & Momentum Breakouts investing group. As extra information factors are collected, extra insights are gained. Often I give attention to publishing market topping alerts, however this time I’m sharing a really constructive improvement that now we have not seen since January.

This previous February signaled the most important market topping sign since August 2022. Since then many sectors have declined with financials among the many hardest hit sector this 12 months. A banking disaster adopted straight after the February detrimental sign, and now we have been ready by way of Could for indicators of a broad constructive market sign. Whereas the Know-how sector has been led by a couple of mega caps in sturdy constructive momentum, it has been a slender commerce that left each the DJIA and Russell 2000 indices in detrimental territory by way of Could. This text serves to reply key questions in regards to the present constructive sign and put together readers for the potential of extra beneficial properties within the quick time period.

Momentum Gauges Dashboard

Market every day gauges, S&P 500, and sector gauges are extremely constructive within the first broad rally in months. All of the sectors turned constructive this week within the strongest broad market transfer since January. Cash flows to oversold sectors like financials, power, and primary supplies could speed up so long as the US greenback continues to say no from peak ranges in Could.

• Information: Maximizing Market Returns With The Automated Momentum Gauges

Market Momentum

Momentum broke out above 70 on Friday after a number of the choppiest weeks on the alerts that now we have seen in years. This was largely because of frequent sector rotation with considerations a few debt default. As I wrote about in my debt ceiling article linked beneath, this sample is in keeping with elevated volatility forward of all of the prior debt ceiling standoffs adopted by sturdy beneficial properties after every deal concludes. This time nonetheless we’re in a unbroken Fed tightening program with 10 consecutive price hikes and the most important QT program in US historical past.

Day by day Market Momentum Gauges YTD

Momentum cleared the uneven equilibrium vary (yellow) this week, however in contrast to the mid-Could leap, all of the sectors this week had been taking part within the breakout. There’s a higher likelihood that this bounce will maintain for the oversold sectors.

Weekly Momentum Gauges YTD are heading towards a 4th consecutive constructive week with a lot much less noise than the every day gauges. The weekly chart illustrates the unexpectedly sturdy momentum circumstances in January that topped in February forward of the latest banking disaster.

These weekly momentum strikes additionally correspond strongly inverse to the motion of the Invesco DB US Greenback Index fund (UUP) proven beneath. Because the greenback declined into January, we had a robust rally that peaked on the finish of February. As Could involves an in depth with the greenback index on the highest ranges since March, we is likely to be headed towards one other rebound off the lows of this cycle.

Why do finance corporations admit that “timing is the whole lot,” however in terms of investing your cash, the bulk inform their shoppers to “simply purchase/maintain and attempt to ignore the downturns?” I submit most buyers would depend on timing alerts, however with no mannequin just like the gauges they’re pressured to attempt to hold their shoppers in purchase/maintain positions for twenty-four months with no beneficial properties, or worse.

If timing helps you achieve simply 1% every week, you’ll considerably outperform all of the long-term market averages.

Very long time members know, we are able to constantly beat the markets by avoiding essentially the most detrimental weeks and loading up throughout essentially the most constructive alerts. Solely the monetary business has incentives to make you to remain within the markets 12 months spherical.

2023 Market Outlook

The Fed has delivered its tenth consecutive price hike within the quickest collection of will increase since 1977. The S&P 500 (SPX) (SPY) are nonetheless detrimental because the Fed started its tightening program on March ninth, 2022 and started climbing charges early final 12 months. After the most recent PCE inflation unexpectedly elevated once more, the chances of an eleventh hike in June jumped to 66.5% and have fallen again to 25% on the CME FedWatch Software. Traditionally, such excessive charges have led to a market correction after each price climbing cycle in US historical past. Though I’m happy to report present constructive momentum, the most important QT program in historical past remains to be ongoing to scale back the Fed’s stability sheet on the quickest price ever carried out, with goal ranges of -$95 billion monthly.

My technique for 2023 is to remain typically bearish whereas adjusting for big bear bounces in anticipation of sturdy similarities to the August topping sample final 12 months. Financial information, inflation, manufacturing productiveness, residence gross sales, and the most recent banking disaster proceed to indicate recessionary weak point into rising rate of interest hikes on the highest ranges since Sep 2007.

Mid-year 2023 is sort of right here and issues could get fascinating with potential for a Fed pivot. Dip-buyers will proceed to attempt to pull this anticipated pivot occasion ahead in time, extending excessive market volatility whereas the Fed hikes charges.

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Sector Momentum

For this text, I wish to spotlight simply two of the eleven sector gauges particularly. The variations between these two sectors additionally accounts for a lot of the intense chop within the markets just lately.

Know-how Momentum Gauges proceed for a 3rd week to be the breakout sector. Damaging gauges proceed to drop sharply from the height of detrimental momentum on Could 4th. The (TECL) 3x Direxion Day by day Know-how bull fund has gained +41.7% from Could 4th and will proceed towards January peak constructive momentum ranges at 180. The expertise sector is the very best weighted and largest sector on the main market indices, particularly the Nasdaq and associated index fund (QQQ). So long as expertise momentum will increase it would profit expertise funds like (SOXL) 3x Direxion Day by day Semiconductor bull fund and the Mega cap bull funds comprised principally in expertise like MicroSectors FANG+ and FANG Innovation 3x funds (FNGU) (BULZ).

Monetary Momentum Gauges have been essentially the most detrimental sector this 12 months from the February 21 sign prematurely of the March banking disaster. This previous Friday gave us solely the 2nd and most constructive sign in over 71 days. Since that detrimental market and sector gauge sign, the (FAZ) -3x Monetary bear fund has gained +29.8%. This new constructive sector sign might mark the beginning of an extended rebound in banks, with the (FAS) 3x Monetary bull fund and associated (BNKU) (DPST) for sturdy potential beneficial properties.

Prior Damaging Indicators In Advance Of Main Downturns

One of the crucial in style makes use of for the gauges is to get superior warning alerts forward of main market downturns so as to defend your investments. Examples of prior main market topping alerts together with the 2018 quantitative tightening (QT) correction and the 2020 Covid correction are proven beneath.

The purpose of this illustration is {that a} majority of all of the alerts detected to date had been occasions exceeding -5% S&P 500 declines to as a lot as -35%, together with one of many worst one-month declines in historical past. I all the time publish many extra present examples and sign articles all year long for anybody excited about following my market updates.

Evaluation Of Prior Indicators

• Sign 19 (November seventeenth, 2021) Momentum Gauge Topping Sign: The Second Largest 2021 Damaging Sign To Date

• Sign 16 (June seventeenth, 2021) Momentum Gauge Topping Sign June 17: The Largest Damaging Sign In 2021

• Sign 11 (January 29, 2021): First Damaging Momentum Gauge® Sign For 2021: Reviewing The Indicators | Looking for Alpha Market

• Sign 9-10 (September 13, 2020): An Election Yr Correction Sign And Solely The third Damaging Weekly MG Sign In 2020

• Sign 8 (June 24, 2020): Evaluating The eighth Market Correction Sign On June twenty fourth That Has Preceded Each Latest Decline

• Sign 7 (March 23, 2020): Revisiting The Indicators That Forecasted Each Latest Decline, In Search Of Early Restoration Indicators

• Indicators 4-6 (Jan 28, 2020) : Revisiting The Indicators That Forecasted Each Main Downturn Since “Volmageddon”: What’s Subsequent

• Indicators 1-3 (Aug 8, 2019): These 3 Measures Forecasted Each Main Downturn Since QT Began: What’s Subsequent

Conclusion

The Momentum Gauges proceed as a part of an energetic analysis venture that has delivered extremely worthwhile outcomes to many readers of my printed monetary articles. I proceed to boost the mannequin as we collect extra information over many extra months and years. The present market circumstances with growing price hikes and the most important Fed quantitative tightening program in historical past could contribute to weaker than common efficiency for 2023.

Traditionally, from 1950, the six-month interval between Could to October delivers the bottom common returns for the S&P 500 relative to all six-month intervals. The present Fed tightening circumstances and method of a possible recession will not be factored and should additional enhance the market dangers this 12 months.

I hope this evaluation offers you with further market perception that advantages your buying and selling within the days forward.

All the perfect to you!

JD Henning, PhD, MBA, CFE, CAMS