April 22 Stock Market Outlook
Here’s a look at some key stock market indicators, charts, and themes that we are watching:
Large-Caps Still in the Lead – Small-cap stocks have outpaced large-cap stocks over the past month, but longer-term trends continue to point to large-cap leadership. The large-cap S&P 500 has been able to rally off of rising trend-line support, while the small-cap Russell 2000 continues to contend with resistance.
Rotation or Just Reversion – Sector-level moves have resulted in some significant leadership rotation. But mixed in has also been reversion to still intact trends. So far, the ratio between the Utilities and Energy sectors (leaders and laggards over the past month and the past year) is consistent with its previous tests of an ongoing trend and not a persistent leadership rotation.
Looking for Confirmation – Sustainable rallies tend to attract broad support, with strength confirming strength. The Transports appear to be confirming the strength seen recently in the Dow Industrials. Broker/Dealers and European stocks, however, have more work to do to provide bullish support for the S&P 500.
Stock Market Indicators – Indices & Sectors (click to enlarge)
Russell 2000 Index
The ratio between the Russell 2000 and the S&P 500 has moved higher over the past few weeks, but on both an absolute and relative basis, the trends still favor large-cap leadership. Early-year weakness saw the Russell 2000 fall below its long-term trend-line and it has not been able to rally back above it. The S&P 500, on the other hand, found support at its trend-line. The ratio between the two indexes suggests we may have entered a period of protracted leadership by large-cap stocks.
Energy Sector
On a year-to-date basis, Energy and Utilities (along with Telecom) are vying for the top returns among the 10 sectors. Over the past month, Energy has been the strongest performer, while Utilities has been a clear laggard. Over the past year, however, the exact opposite is true – Utilities have been the best and Energy the worst. As pronounced as the short-term shift toward Energy (and away from Utilities) has been, it appears too early suggest a lasting rotation is underway. The ratio between these two sectors has seen similar moves over the past 18 months. These bear continued watching, as reversion to trend can morph into leadership rotation.
Dow Transports
The Dow Transportation Average has broken above its down-trend line, providing confirmation of the strength seen the Dow Industrials and the S&P 500.
Investor Sentiment
Investor sentiment data continues to offer a generally mixed picture, but the NDR Daily Trading Sentiment Composite has edged back into Excessive Optimism territory. The recent track record of this sentiment indicator has been pretty impressive and it suggests that stocks could struggle to continue to rally in the near-term without a rebuild in investor pessimism.
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