Stocks are currently digesting the rally that we have seen over the past six weeks. This is
especially true for the market cap weighted Nasdag and S&P 500, whose performance is
largely dictated by large mega cap technology stocks. As we (and others) have pointed
out many times recently, those few stocks have been the primary driver of market returns
this year. As such, they have become overbought and ripe for a correction, which I
pointed out last week. The good news is that everything else in the market is catching up
and beginning to outperform. I have discussed this positive development in market
breadth for the past two weeks and the trend has continued. Simply put, the rally is
broadening out and that is good for the prospect of it being sustainable. As an example,
the DOW industrials (XLI) hit a new all-time high last week. At the same time, we saw the
airline index break out above resistance. Both of these offer support to the idea that the
economy remains resilient.
I think weekly charts matter more than daily charts and do a better job of filtering out the
noise of daily trading back and forth. The weekly charts of all the major indices are now
positive and trading above their respective 50-week moving averages. I would also point
out that they have made a series of “higher lows” over the past few months and are now
breaking out to “higher highs”. This constitutes a technical positive trend and is good. I
have included performance charts of the equal weight S&P 500 (RSP), the market cap
weight S&P 500 (SPY), the Russell 2000 small cap (IWM), the Dow Jones (DIA) and the
Nasdaq 100 (QQQ) for reference below. I am using 50- and 200-week simple moving
averages for context, and all charts were pulled from stockcharts.com on June 21, 2023.
At Cabana, we added stock exposure across our portfolios last week and remain hedged
with longer dated treasuries and corporate bonds depending on the risk profile of the
portfolio.
We are in our Transitional Bearish (improving) scene.