This week started pretty rough, with a close just below the August 2022 high. Price reversed the rest of the week, and SPY set a new high for 2023. RSP (equal-weighted SP500 ETF) also had a strong week but is still below its January high for 2023. Seeing strength in these two ETFs gives me the conviction that the move up is set to continue. The shape this move-up will take is open for debate. Both SPY and RSP are rapidly approaching another possible area of resistance. There is also a discussion about whether the fundamentals of the companies in the SP500 can support this move. It is always wise to remain knowledgeable of the reasons you might be wrong, and these are the ones I am watching for myself.
Friday opened with a gap fueled by the favorable inflation report released today. This report showed inflation to be heading in the right direction. If inflation continues to trend downward, there is a hope that the Fed will not raise interest rates as far, though it seems likely they will still raise rates at least twice more this year.
Stocks Rally After Favorable Inflation Report (barchart.com)
Sectors
I have mentioned before that we need to see the sectors in the lead rotate for a healthy bull market. This week we have seen that rotation happen. Energy (XLE) led this week in the 5-day percent change, followed by Materials (XLB). Technology (XLK) fell to the middle of the pack while remaining positive. Looking at year-to-date, XLE is still negative but appears on the road to recovery.
Another way to visualize relative sector performance is through the Relative Rotation Graph (RRG). An RRG shows how selected securities are doing compared to a benchmark. For our case, we are looking at the sectors compared to the SP500 index as a whole. Generally, securities rotate clockwise around the chart with quadrant names referencing their performance compared to the benchmark. Visualizing the sector’s performance this way, we see that XLK is rotating out of the leading quadrant, and other sectors are moving to take its place. This a sign that this rally is not exclusively in technology stocks.
Across the sectors of the SP500, breadth remains strong. We are seeing higher levels of participation in each sector, with the exception of Utilities (XLU). Seeing increased participation also increases my conviction that the move up will continue.
Going into next week, I am watching for breadth to continue to strengthen and a general uptrend across the sectors. I hope everyone has a great weekend!