Global markets experienced yet another exceptionally volatile week as bond rates continued to move higher, although Friday’s session proved to be a positive one for major indexes.  Since reaching an all-time high on February 16, the S&P 500 (SPX) Index posted a negative return of -2.31% (through 3/5), while the Nasdaq Composite (NASD) fell -8% over the last 12 trading days, putting the tech-heavy index just off of correction territory.  Although we have not seen any long-term shifts in the strength of US equities, today we want to provide an update on where we stand after a volatile week that caused some movement across the various indicators that we monitor closely.  There is positive news for the markets in our headlines below.

US Equities Still #1

As it now stands, US Equities is still the current and long-term winner in our Dynamic Asset Level Indicator (DALI) suggesting a continued tactical overweight to this asset class across your portfolios.  As explanation, see the chart below.  The six common and broad asset classes are ranked from green to red (strongest to weakest) on the left vertical while the sector rankings within each asset class are ranked from green to red (strongest to weakest) horizontally.  This DALI chart, guided by what investors are doing as opposed to what they are saying, has provided us with excellent guidance during the past nearly two decades to help us be invested in the strongest areas of the markets while leaving the weakest ones out of your portfolios.   One major shift we saw recently in the asset class ranking was the International Equities asset class falling to the third-ranked position while Commodities moved up to the second place for the first time since January 2017.  We are reviewing and changing your current asset and sector allocations as a result.  Currently, US Equities leads Commodities by a good margin.  Additionally, when compared for strength against Cash, we see that the US Equities asset class continues to maintain its strength relative to Cash.

DALI Chart

Trend Indicators Remain Above 50%

Trend analysis is one of the cornerstones of our research. We utilize trend as an absolute indicator to help understand the current state of different areas of the market.  The Positive Trend Indicator chart measures the percentage of components in a universe that are trading above their bullish support lines. Currently, each of the major market and index Positive Trend indicators remain above the 50% level which is considered a healthy market.  Through Thursday’s close, the Positive Trend for the NYSE sits at 78% while the Positive Trend for the S&P 500 sits at 80%, and the OTC is at 60%.

Indexes Remain in Positive Trends

The chart of the S&P 500 remains in a positive trend.  There is support at the 3,740 level while the long term bullish support line resides at 3,500.  A move to 3,920 would return the chart of the S&P 500 to a buy signal for the first time since February.  Similarly, the chart of the NASD remains in a positive trend above its bullish support line that has been in place since May 2020 although recent action caused the NASD to break a triple bottom at 13,000 on Wednesday before moving lower to 12,600 on Thursday.  Unlike the S&P 500, which experienced a reversal up on Friday, the NASD has continued lower to the 12,650 level.  Additional support levels sit at 12,300, while the trend line would be tested with a move to 11,500.

Things of note:

  • Market pullbacks (down 5-10%) are fairly common, occurring on average three times per year. Before Friday’s recovery, the S&P 500 was down around 5.5% from recent highs. The previous pullback was last October/November, so the timing of this one is not particularly surprising.
  • Markets often get choppy and move sideways after hitting a series of all-time highs. These periods of consolidation tend to be healthy for the market in the long run.
  • As the economy reopens there has been a pronounced shift in performance across various sectors of the market.  Technology and Consumer Discretionary outperformed in 2020 and early January 2021, compared with other economic sectors.  So far this year, those two sectors are significantly underperforming Energy and Financials which are up over 40% and 14.4% respectively.  Conversely, Technology is down 1.1% and Consumer Discretionary is down 3.3%.

Let us know if you have questions as we move to re-allocate your portfolios to take advantage of the changes we are seeing.