What Lies Beneath?

Technology has had a stellar run over the past few years. It has led the Market or indexes for much of the run from 2016 (4th) wave lows at 1800 on the S&P through today. It now represents a remarkable 26% of the S&P 500. So as pundits have punned, “As Tech goes, so goes the S&P 500.”

Or does it?

It’s really easy to point to Tech as the leader and draw linear conclusions from it. This week Wall St was much ado about the FANG’s…(Facebook, Amazon, Netflix, Google) and the other strong momentum Tech counterparts like Apple. They began to show signs of weakness. They where down quite drastically in comparison to the benchmark indexes. They had a bout of pronounced noticeable underperformance for the first time in quite awhile.

So are the FANG and Momentum Tech stocks much ado about nothing? Or should market participants be taking notice as early weakness to come?

Let’s dive deep into the construct of the Market or what lies beneath. Industrials, Materials, Financials, Health-Care are all Negative on the year as early as last week, have all turned strongly and are all barely up or slightly red on year. In other words they haven’t even gotten their motors runnin’ yet. Compare that to Tech which is up over 10% year-to-date. During this bout of Tech underperformance we saw a noticeable strength in the above mentioned sectors. This was new.

All those sectors have potentially completed their corrections over the first half of the year. They are all looking pretty constructive off those lows. The shiny objects right now are the aforementioned FANG and momentum Tech stocks. These are often strong signs of Sector Rotation. The masses miss out on paying attention to those 4 sectors building internal strength because the headlines are about negative Tech. These areas are now leading, that is the healthy BREADTH we want to see. Albeit it’s only a few weeks off the lows, but this is the ooommmphhh required to catapult the S&P 500 up and out of this correction into its next path to 3000+ on the S&P 500.

Industrials, Materials, Financials, Health-Care represent 41% of the S&P 500. They are showing very positive early bullish signs.

Now throw in the Consumer Discretionary sector which has been en-fuego this year as a market leader and +10% year-to-date. It could very well be in the bullish continuation part of its move. That’s another 13% of the S&P 500 weighting, so now a total of 54% of the Market are in potentially strong sectors.

Next we look at Energy, which is in a cycle by itself, but has much more meat in its potential recovery to new cycle highs. It’s been a leader behind Discretionary at +5% on the year. Energy has had a huge move in a short period so after a potential recent consolidative pull-back/digestion it can very well begin marching to new cycle highs. That’s another 6% of the Market in a good bullish posture putting 60% of the market in a stronger positioning.

Real-estate, Utilities, Telecom and Staples are pretty inconsequential in totality representing 14% of the Market. None of those areas look spectacular, none look dreadfully awful, so we can throw them in the neutral camp. The market does not need these areas to lead to go higher. And in fact often times when Staples lead it’s a bad sign as a flight to “safety”, so actually Staples not leading is good thing!

The elephant left in the room is TECH, at a whopping 26% weight.

So the Math: Even if Tech were to go down in some areas, the 60% of strong sectors we detailed above overpower that weighting. We could still technically and mathematically see the S&P 500 higher and Tech down, it’s possible. (This is an example of math for illustration – not a bearish Tech call by the way.)

If Tech goes sideways, the Market can still go up.

If Tech keeps going up maybe just not at its past torrid pace, we have a strong recipe for the market to go up faster and further.

In conclusion, for the first time in long while, the market background is not reliant on Tech to go up and do a lot of the heavy lifting. Early bullish signs are being signaled in Industrials, Materials, Health-Care & Financials with Consumer discretionary and Energy continuing their leadership. These other sectors and areas of the market are well positioned to take the baton and carry the market out of this correction and back up to new highs.

What lies beneath is bullish. Quite bullish. As long as these areas can do their job, and Tech weakness does not spread, the market is in prime shape to put this correction behind us.

Enjoy your weekend. We’ll be back, dark and early on Monday.

Mike Harris

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