Any Change In Market Leadership?

The stock market rally got the big boost the bulls have been hoping for and the bears have been concerned with the lower-than-expected CPI Report. It was not surprising that stocks opened sharply higher after the report on Wednesday as the S&P 500 opened 33 points higher.

The FOMO and short covering accentuated the gains as the pressure was on those still negative strategists as well as those that were under-invested. Most now agree that inflation has likely peaked as the Reuters headline concluded that “June inflation data may have pushed Fed over the mountaintop”.

This does not mean that the Fed won’t raise rates at the next meeting, but a prolonged period of rate hikes now seems unlikely.

Those who are not in stocks will likely feel an increased fear of missing out once they look at last week’s performance results. The small-cap iShares Russell 2000 led the gainers up 3.7% followed by a 3.5% gain in the Nasdaq 100.

The S&P 500 added 100 points for the week gaining 2.4% which was matched by the Dow Jones Utility Average which is still down 4.1% year-to-date (YTD) The Dow Jones Industrial Average was up 2.3% while the Dow Jones Transportation Average was up 1.7%.

For the week on the NYSE Composite, the market internals were strong with 2292 issues advancing and just 813 declining. On the Nasdaq Composite, the advancing stocks led the declining ones by a 2-1 margin.

It was the market internals last Monday that was 2.5 to 1 positive when the market averages were lower. The chart above it as of Monday’s close and the A/D lines sent a clear message. The action made it clear that the uptrend in the daily S&P 500 A/D line had resumed.

This was also the case for the NYSE Stocks Only A/D and NYSE All A/D Line as they all supported a bullish stance heading into the CPI Report. All of the daily lines closed Friday much higher that they are in this chart.

The weekly chart of the Spyder Trust (SPY
PY

SPY
) shows that it is now just 2.8% below the March 2022 high of $462.07. The weekly starc+ band is even closer at $458.62. The rising 20-week EMA and strong support is at $422.81.

The weekly S&P Advance/Decline line was sharply higher last week. As noted at the time it moved above the resistance at line b, with the close on June 16^th. That was just five weeks ago and it has been leading the market higher as the A/D line points to a new all-time high.

The weekly chart of the market-leading Invesco QQQ
QQQ
Trust (QQQ) shows that it has already moved above the March 2022 high. The weekly starc+ band is now at $389.31 with the all-time high at $408.71, line a. This is now just 7.8% below the 2021 high.

The Nasdaq 100 A/D line has moved definitively above the downtrend, line b, from the late 2021 high. This is a further strong sign that the major uptrend has resumed. The WMA on the A/D line is rising strongly, which is a positive sign.

The relative performance (RS) bottomed in early 2023 as it moved above the downtrend, line c. This confirmed that it was now leading the S&P 500. It shows no signs yet of a top as its WMA is rising. The daily RS (not shown) made a new high last week and shows no signs yet of a short-term top.

As I pointed out on Twitter, the iShares Core S&P Small-Cap (IJR
IJR
), was a favorite after Monday’s strong close based on the A/D line analysis noted earlier. I have been watching the small-cap markets but the action of the iShares Core S&P Small-Cap (IJR) looked more positive to me technically than the iShares Russell 2000 (IWM
IWM
). The monthly R2 and next upside target for IJY in the $106-$108 area.

The S&P 600 Advance/Decline line had broken its downtrend, line a, in early June and then after Monday’s close moved strongly above the resistance at line b. This completed the bottom formation.

For the past month or so there were signs that we might be seeing a change in leadership between growth and value. One of my favorite tools to analyze this relationship is to look at the ratio of the iShares Russell 1000 Growth (IWF
IWF
) to the iShares Russell 1000 Value (IWD
IWD
).

When the ratio is falling as it was for most of 2022 it meant that value stocks or ETFs were leading growth. That changed in early 2023 as the weekly MACDs and MACD-His turned positive. The uptrend in the ratio accelerated in May as the resistance, line b, was overcome. This completed the bottom formation.

In June the MACD-His formed lower highs and started to diverge from prices, line c. This suggested that we could be forming a top. That divergence has continued for the past five weeks. Last week the ratio made a new high for the year. This is a sign that growth is still leading and that I was too early in looking for a top in growth and a bottom in value.

This makes it likely that there will be more pain for those who have been avoiding growth since the start of the year. Many value ETFs continue to look positive as IWF just gained 1.3% more than IWD last week as it was up 1.9%. The ratio analysis indicates that value ETFs are likely to lag the growth ETFs for now.