Industrials may lead the bull market

I’ve been harping on quite a bit lately about the breadth (specifically, the lack of breadth or broad sector participation) of the S&P 500. As you know, that index (and the NASDAQ) have been almost exclusively driven by technology, and even more so by about 7 specific such stocks within that sector.  I’ve also noted that the more diversified NYSE index, which represents a far, far more accurate picture of the ACTUAL market…. is not breaking out – chart below. And of course, I have further bemoaned the fact that we have a number of sentiment indicators screaming “irrational exuberance” by market participants. Particularly by retail investors (dumb money).  So I’m a bear, right? WRONG!!!

The problem that we are looking at right now can easily be rectified. Markets can broaden out from the “all about tech” concentration. Sentiment can start to pull back from extreme optimism. For example, we are seeing some movements into a number of sectors that were being ignored only a month ago. Here’s a 10 day (2 weeks of trading) performance chart. The 0 line is the SPX. Anything above that line is outperforming the SPX, below is underperforming. Anything near the line is near beta 1 (relative same performance).

Points to note on the above chart:

  • Technology (pink) is underperforming now!
  • Utilities, Financials and Real estate (far right 3 bars) remain underperformers
  • But…everything else is moving towards outperformance.
  • Industrials (cyan blue) are the outstanding movers of late.

This is only 2 weeks. But…its a step in the right direction.

Now I’d like to take a look at the industrials. Note that the DJIA is NOT a pure industrial play. Its chock full of banks, tech, drug stocks, retail, communications, etc. Still, its a vastly better distribution (less concentrated) than the SPX. Again, this gives us a better picture of the “real” market, not just 7 cap-overweighed stocks.

Here’s the INDU chart. Note that it is toying with resistance. A good solid breakout through 34,000 would be very bullish.

Now lets look at the pure industrials play via the XLI ETF. This ETF is an actual industrial sector play, unlike the misleading title of the DJIA index – which holds a whole whack of different sectors. Two things to note:

  • The industrials are at all time highs! Even the tech sector can’t make that claim (XLK chart, not shown, is currently failing at its highs).
  • The breakout has lasted about a week. So far, it looks like it may hold.
  • This tells us that strength is diversifying outside of tech – and may in fact be rotating out of tech (way too early to make that claim, but the performance chart above is showing that has been a 2-week trend).

 

Meanwhile, sentiment is NOT improving. Here’s just one of my indicators. Note how the VIX has been down trending, which historically means the market is up trending. When the VIX hits around 12, it tends to reverse and begin an uptrend. Subsequently, the market then enters a downtrend, or a sharp correction (which would be my guess this time). My green arrows paint a clear picture of this relationship.

You’ll note the low levels of the VIX, still near 13. This is too close to my trigger point to be uber bullish. Note the pattern on the charts to experience sharp corrections at or below VIX readings of 12.

As an aside, nothing has changed in the other sentiment indicators I watch (Smart/Dumb$, AAII, NAAIM, Put/Call, etc). They, like the VIX, are all near extreme optimism points. Not good.

 

Conclusion

Its really encouraging to see the sector rotation action over the past couple of weeks to broaden the market out a bit. More of that must be seen. But…. so far, so good. Meanwhile, its NOT so encouraging to see sentiment readings near their bear-signal points. Ying-and-yang, as I called it on my latest BNN episode.

I’m not a raging bear. I am not a raging bull. I’m actually pretty neutral. I am hopeful that the sentiment indicators signals noted above will result in a quick correction, which would bring the leading stocks back to less overbought conditions. I am also hopeful that the market continues to reward a broad spectrum of sectors, as seen in our chart at the top of this blog.

If those conditions play out, I will be the first to scream “BULL Market” from the top of the mountain. Meanwhile, I wait it out. Patience, grasshopper.

5 Comments

  • Are investors deluded with Chat GPT? Companies would simple reduce head count of talented professionals with a big outlay in GPT microchips, thinking it will fatten their bottom line and wallets. But that capital cost in microchips to fuel GPT intelligence is only recoverable over decades after.

    In the meantime, e-vehicles are replacing fossil fuel engines in vehicles, as the latter did with horses and carriages 150 years ago.

    The companies involved in the new generation electrical vehicles, mainly batteries, will reap the riches.

    On CNBC, they stated 80% of a battery is nickle in those e-card, and 1.5 million tons of new sources of nickel will be required by 2050.

    Companies such as teck.b, HBM and others may very well be 100 baggers here. Not Fangle Chat GPT pump & dump stocks.

    Reply
  • I feel like we’re seeing more tension between technicals, and fundamentals and macro than usual this year. High p/e tech is supposed to take a back seat in rising rate environments, therefore XLK shoots through the roof. Commodities should do well in inflationary regimes, and they’re rock bottom performers. Now industrials – those poster children of economic sensitivity – are waking up as we slide into weaker economies. Are these shorter-term disconnects, or is the market looking forward past whatever recession or slower growth that’s on the horizon?

    If the market’s goal is to confuse, frustrate and de-stabilize investors, it’s doing a great job!

    It’s going to be very interesting to see if cheaper small or mid-caps, as well as industrials, can get traction after the current correction. Maybe we get another low in August or September that’s higher than what we saw last fall, but it doesn’t seem probable that we’d return to that old low from October, 2022, given the overall strength of the uptrend this year. I also followed up on your blog about international markets, and am looking to enter some of those because they’re doing well and way cheaper than the Nasdaq and S&P 500.

    Reply
    • Great comment Paula–yes, its a world, world, mad out there! As Bill Murray said in Ghost Busters: “Human sacrifice! Dogs and cats living together! Mass hysteria!”

      Reply

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