The index rose above the 200-day moving average and stayed there. And the three indicators (ADX, price/volume, and Elliott Wave) show bullish price action in place. Looking good so far, but a deeper look reveals concerning undercurrents.
2022-03-27-SPX Trendline Analysis - Daily
The biggest issue is trading volume, which decreased throughout the week. If you discount the quarterly, monthly, and weekly option expiration on March 18, trading volume has fallen for almost the entire uptrend! Rising prices on decreasing volume is a sign of weakness, not strength. When there's a lack of sell order volume, it takes a relatively low level of buying to clear out those orders and move prices higher.
2022-03-27- SPX Elliott Wave Analysis - Daily - Primary 2
From a technical analysis standpoint, the SPX is knocking on the door of the resistance levels mentioned last week. The 61.8% Fibonacci retracement sits 7 points above Friday's close of 4543, and that's a stone's throw away from the early February resistance at 4595. A negative divergence in the RSI(5) also popped up last week as the market made new highs.
As of Friday's close, the SPX sits ~9% from the mid March low. Essentially, the market has halved it's losses from the start of the year despite all the geopolitical turmoil and interest rate variability! Mega-cap tech stocks also rebounded nicely the past 2 weeks (e.g. $AAPL, $GOOGL, $AMZN, $TSLA, etc.).
But the gains aren't evenly distributed. If you look at sector performance for Q1, energy ($XLE) is by far the star, gaining ~39%. Since the S&P is down ~5%, that means it's outperformed the index by 44%! Utilities ($XLU), and financials ($XLF) also outperformed, while telecom ($XLC), consumer discretionary ($XLY), and real estate ($XLRE) underperformed.
As we head into Q2, remember that most companies will have extremely tough year-over-year comparisons to overcome, in terms of revenue and profitability. This is especially true for sectors like technology ($XLK) and consumer discretionary ($XLP). And most "passive investors" are overexposed here, because the mega-cap stocks in these sectors make up a large part of most capitalization-weighted index funds.
So regardless of whether you're bullish or bearish overall, last week was an excellent time to reallocate holdings.
Best To Your Week!
Charts provided courtesy of stockcharts.com.
Once a year, I review the market outlook signals as if they were a mechanical trading system, while pointing out issues and making adjustments. The goal is to give you to give you an example of how to analyze and continuously improve your own systems.
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