Favoring IWM, XBI, And KRE

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In the end, the PPI data echoed the hot CPI. The S&P 500 and the Nasdaq tumbled, while inflation plays (such as materials, energy, silver, gold, oil, and copper) all performed the best due to positive manufacturing data affecting industrials the day prior.

This not only defers the rate cut bets, as per Wednesday‘s article – worse, it also carries the potential that as we see inflation bottom at around 3%, its next trajectory towards 3.5%-4% year-end could necessitate not just higher-for-longer policy, but also rate hike(s). So, forget Goolsbee‘s rate-cutting optimism, and get ready for questioning disinflation.

This presents several consequences beyond the sector picks mentioned within the S&P 500 chart. The HYG is consolidating on high ground, but it isn't truly leading the equities surge in 2024, and the S&P 500 momentum is slowing down significantly.

Yet, I see signs of market breadth improving, and it‘s within interest rate sensitive sectors where such signs "shouldn't" be present, yet they're still there – and tech is clearly faltering. To me, that means we should get more trading range days such as what was seen on Friday. That trading session produced a series of fast, yet very profitable intraday moves.

In which way would these wild ranges be resolved, though? It's time to employ ratios. Just like I utilize sector ratios such as XLF to XLU, XLY to XLP, or SPY to TLT, this is the time to look at IWM in comparison to the SPY. It appears prepared to break higher over the months ahead (think up to twelve months). I had been talking about the Russell 2000's incoming breakout of the two-year base in late 2023 already, as I view it as a really long-term outperformer.

Even though it‘s not attracting that much trading attention, the percentage of stocks reaching for new 2024 highs in the Russell 2000 is looking much better than for those in the S&P 500 or the Nasdaq. For all the publicity Super Micro Computers was attracting on Friday, this is not the top dog of Russell 2000, which barely declined. Another way to play this area is by being long the Russell 2000, and short the S&P 500 if you don‘t want to engage with the Nasdaq directly.

One more aspect as to why the S&P 500 upswing isn't yet done is the tax filing and check writing going on. Liquidity will first start to slowly disappear from the stock market in March, and more noticeably in April. Hence that even if S&P 500 faces decreasing momentum and a rotation out tech, conditions favoring a rug pull aren't here yet. The clock is clearly ticking, though.

In terms of individual stocks, Apple and the 200-day moving average are as much indicative of the S&P 500's path ahead as Amazon and Netflix are. The key event, of course, is Nvidia's earnings release on Wednesday after the close. Given the price action seen so far, I lean towards initial caution followed by higher highs.

Let‘s move right into the chart, which is courtesy of StockCharts. Today‘s full scale article contains 3 of them, featuring the S&P 500, precious metals, and oil. However, I will only cover crude oil here.

Crude Oil

crude oil

(Click on image to enlarge)

Image Source: StockCharts

Crude oil appears to be readying a move into the $81-$82 zone, and that‘s not the final destination. In the weeks ahead, I‘m more bullish on oil than gold.

More By This Author:

Tame PPI Equals Risk-On
Positioning For PPI
Forgetting May Cut

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