For the past few weeks, we’ve discussed sector rotation in the S&P500. On Wednesday SPY and the S&P500 traded briefly above the February highs for a new all-time high, printing (339.61) for the high of the day. Futures are red (-11.00) in early trading (3361.50).
Is it time to take profits off the table? Gold, crude, and global stock markets are lower this morning on the Fed’s pessimism. Is it enough to derail the seemingly unstoppable SPY and S&P500?
Price action remains above the 9ema, 21, 50, and 200d moving averages. Volume picked up a bit on Wednesday, yet SPY closed near the February peak and more importantly, above the 9ema. A close below the 9ema is a warning sign.
MACD will most likely cross today going into August OPEX.
If we remove the noise and look at the price action irrespective of the news and political rhetoric we can see white bricks. Until SPY prints its first red brick the big picture is still bullish.
A few red bricks do not mean the rally is over. As we can see SPY had 4 periods of consolidation since the March 23rd low. That said, we are considering hedges in SPY puts or VIX calls if SPY closes below the 9ema this week or next.
SPY Sector Rotation
The sector rotation we’ve been watching for the past few weeks has taken us back to all-time highs. Not much has changed. Technology (XLK) was weakening, yet now appears to be making a U-turn back towards the upper right quadrant “leading.” Discretionary (XLY) and materials (XLB) are still leading. The four sectors in the bottom left quadrant (XLU, XLRE, XLP, and XLV) are still pointing higher. These four could assist the “sector rotation” scenario rather than “distribution” at all-time highs.
For the past 5 weeks, sectors are performing better than expected considering August is usually the weakest month of the year. Consumer discretionary is a clear performer, while the only sector underperformance is coming from interest-sensitive utilities (XLU) off less than 1%.
With just over an hour before the opening bell on Wall Street, our thoughts haven’t changed. While red days are unpleasant, we cannot expect the markets to go up every day. Pullbacks help the market refresh so that it can move higher.
Until price action closes below the 9ema, we will stay cautious and take profits into strength where warranted. When our positions are up more than 20% we always take some off.
And, if the markets start to falter hedge with SPY puts or VXX calls. Gold isn’t working the past few days (-25 pts) this morning. The yellow metal is printed a lower high. If you’re long we would watch for an area to reload in the next few days.
Bonds don’t look that great as a hedge either, with the 20yr bond (TLT) below key moving averages, the 9/21, and 50d, while printing lower highs in the process.
S&P500 Outlook – SPY
SPX 3400 remains the top/resistance, with potential 3300 low into August Expiration – overnight 3350 support held.
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