The last few months have seen a significant shift back from value to growth. We will often focus on the large cap comparison, but we have seen the value versus growth difference significantly on the small cap side as well. The iShares Russell 2000 Value ETF (IWN) crossed below the acceptable 3.0 fund score mark on July 16^th and now has a fund score of 2.75 with a negative score direction of -1.90. In the DALI allocation tool, the small cap value style has fallen from second to sixth since the beginning of July. IWN moved to sell signal on July 8^th and went on to test support at $152 before rebounding to the middle of its trading band. Since the end of the second quarter, IWN has returned -3.43% while RPG, the Invesco S&P 500 Pure Growth ETF, has gained 6.14%. Moving forward it will be important to keep an eye on small cap value areas as we’ve seen higher relative strength out of large caps and growth areas over the past few months. 

Each week the analysts at DWA review and comment on all major asset classes in the global markets. Shown below is the summary or snapshot of the primary technical indicators we follow for multiple areas. Should there be changes mid-week we will certainly bring these to your attention via the report.

Observations:

• It was a positive week for a majority of our major technical indicators. Beginning with the bullish percents, we saw BPNYSE reverse back up into Xs at 56% while BPALL, BPOTC, and BPWORLD held steady in Os just beneath the 50-yard line.
• We did not see any changes in the major positive trend (PT) charts. PTWORLD remains the lone PT indicator in a column of Xs, but each remains at or above the 50% line.
• However, each of the HiLo charts reversed back up into Xs; ALLHILO, NYSEHILO, and OTCHILO now read 64%, 78%, and 54%, respectively.
• Two of the ten-week (TW) readings also edged higher this week. TWALL and TWNYSE ticked up in Xs to 38% and 44%, respectively, while TWOTC and TWWORLD held steady from last week.
• Finally, we saw a single advance from the thirty-week indicators; 30NYSE ticked higher to 62%. 30ALL, 30OTC, and 30WORLD held steady at 48%, 38%, and 54%, respectively.

Beginning this week, the U.S. Senate has started discussions about the infrastructure bill (for full details on the bill, click here). While many have said it’s been a slow slog, many articles note the bipartisan support that the bill is receiving within the U.S. Senate (Source: Reuters). While the bill has yet to pass, we thought we’d begin a discussion on how investors could seek to play the bill and touch on those sectors and sub-sectors that may benefit or be impacted. Additionally, we will note which of these sub-sectors are currently exhibiting high relative strength and how users are able to utilize the DWA Security Screener in culling out high RS actionable stocks within these sub-sectors.

The image below shows the current rank of the sub-sectors that may be impacted most by the infrastructure bill within the DWA Sub-Sector Matrix. The DWA Sub-Sector matrix has 96 representatives within it and the table displays the rank of our select sub-sectors as of the close on August 3^rd. Bear in mind that the infrastructure bill has not been passed and that the potential list of sub-sectors that may be impacted is very broad. The sub-sectors shown below are by no means the final list as by the time the bill is passed, the list could either be more or less than those shown. The degree to what sub-sectors may be impacted most is also possible to change as well, our goal was to simply cast a broad net and see what sub-sectors currently show high RS and those that don’t.  The table is also organized by rank and divided by those that rank in the top half of the sub-sector matrix (in green) and those that rank in the bottom half of the matrix (in red).

In examining the sub-sector matrix, leadership currently lies within those sub-sectors that lie generally within the Industrials and Basic Materials broad economic sectors. This isn’t too surprising as these two broad sectors, and their subsequent sub-sectors, seem to be the ones to potentially benefit most from the infrastructure bill due to the focus on constructing new roads, bridges, and transportation thoroughfares, and both broad sectors have ranked within the upper half of the DALI sector rankings for much of this year. The remaining points of the current bill seeks to expand broadband access the rural areas, provide better access and incentives for electric car manufacturers, and improving the water quality along with reducing pollution. The bottom half of the sub-sector matrix ranking is where we currently find those sub-sectors related to communication improvements, water improvement, and pollution reduction. We may see some of these groups improve in relative strength and potentially climb the sub-sector rankings, but until the bill’s passage, we don’t know if that will come to fruition. As noted above, this is by no means the final list of sub-sectors that may benefit from the infrastructure bill, but it is a starting point. As we’ll discuss below, having these sectors as a starting point is a great way to look for potential stock ideas.

Within the DWA Security Screener, we can use the aforementioned sub-sectors discussed as the starting universe for a stocks query. This process can also be used to search for ideas within the broad economic sectors, DWA sectors, and even the sector indicators as well. To find the tool, click Security Selection, then Security Screener followed by Run Stocks Query. Once the query page has loaded, locate the blue universe box at the top of the page and find the Economic Sectors header near the bottom left of the blue box. After clicking the Click here to toggle sectors link, the universe box will expand and display all the broad sectors, DWA sectors, sub-sectors, and mini-sectors available on the platform. Select the desired sectors that would be the starting universe (in our example shown we have selected Heavy construction and Heavy Machinery) and then add the remainder of the technical criteria (technical attributes, positive trend, etc.) in the boxes below. Bear in mind, that the broad economic and DWA sectors that coincide with the sub-sector or mini sector will be checked off automatically, but the universe will focus on the group(s) of stocks from the lowest level selected. If you have any questions on what further criteria to use or how to utilize the tool, feel free to call the NDW team at (804) 320-8511. Additionally, stay tuned later this week as we discuss some potential stock plays based on the infrastructure bill.

Portfolio View - Major Market ETFs

Additional Comments:

Overall, it was a bullish week of trading for the major market funds covered in this report as nine finished in positive territory while just one, the Invesco S&P 500 Top 50 ETF XLG, managed to finish in the red with a slight loss of -0.19%. Although this week’s price action didn’t cause any notable changes from a technical perspective, the iShares MSCI Emerging Markets ETF EEM experienced a rebound over the last seven days, gaining 3.41%, which pushed the fund back into the black for the year. On a year-to-date basis, the Invesco S&P 500 Equal Weight ETF RSP now leads all 10 major market funds as it has gained 20.53% on a price return basis, followed by the iShares S&P SmallCap 600 Index Fund IJR’s YTD return of 20.32%.

As of this writing, the US Equity Core Percentile Rank, which can be found on the Asset Class Group Scores page, is sitting at 98.59%, meaning that the “Core” market ranks in the 98th percentile versus all other asset classes around the world. The US Equity Core Rank, which is also known as the DWA S&P 500 Assets Percentile Rank, is sitting at lofty levels that are not often seen. Currently, each of the S&P 500-related major market ETFs covered in this report are trading at all-time highs, maintain Point & Figure buy signals on their default charts, and are trading in overall positive trends with fund scores well above the acceptable 3.0 threshold. In fact, on Monday, August 2, we saw the Invesco S&P 500 Equal Weight ETF RSP record a new all-time high with a move to $154, which also marked the fund’s fifth consecutive buy signal since May. With a solid fund score of 5.35 and a relatively neutral OBOS% reading of 37%, the RSP is actionable at current levels. The US Equity Core Percentile Rank is one more piece of evidence in favor of US Equities, which has ranked #1 in DALI since August 25, 2020. Click here to view our recent Core Percentile Ranking decile study published on July 8, 2021.

SECTOR BULLISH PERCENT CHANGES

Average Level

50.16

oils

tele

CHEM

oil

META

INET

HEAL

medi

BUIL

BUSI

GAME

reta

COMP

AUTO

food

bank

prec

AERO

prot

SOFT

TEXT

MACH

biom

LEIS

rest

fore

ELEC

FINA

SEMI

guti

drug

wall

hous

tran

INSU

euti

savi

WAST

STEE

real

0-14

16-20

22-26

28-32

34-36

38-42

44-46

48-52

54-56

58-62

64-66

68-72

74-78

80-84

86-100

SECTOR INDICATOR CHART CHANGES

PT is the percentage of stocks within a sector that are trading above their bullish support lines. RSX is the percentage of stocks within a sector whose relative strength charts are in a column of Xs. RSP is the percentage of stocks within a sector whose relative strength charts are on a buy signal. The strongest sectors, i.e. market leaders, will have most of these indicators positive and moving higher in a column of Xs.

FAVORED SECTOR STATUS CHANGES
A sector is considered to be Favored if it has 3 or 4 of the sector indicators (Relative Strength, RSX, RSP, & PT) positive, Average if it has 2 of the 4 indicators positive, & Unfavored if it has 0 or 1 of the indicators positive. The table below contains those sectors that have experienced a Favored Sector Status change over the past week. It is best to focus on sectors that are about 50% or lower on their Bullish Percent charts & are in Xs. Note: If a sector moves from Favored to Average, it doesn't necessarily mean that the sector in question has to be sold - it just means you need to evaluate your individual positions with exposure to that sector. 

Favored		Average	Unfavored
4	3	2	1	0
	TEXT	SEMI  WAST  guti		tele
4	3	2	1	0

There has been a significant amount of movement in certain foreign equity markets over the past month, however, the relative strength picture shown through our NDW Country Index Matrix ranking has remained largely unchanged, with no changes to the constituents of each quartile in July. The past week did see the Netherlands move back into the top-ranked position out of the 43 countries examined, with that country having maintained a rank of third or higher since November of last year. In fact, both the Netherlands and Sweden have been among the most consistent representatives in the country index matrix rankings, with the Netherlands remaining in the top quartile since December 2019 and Sweden staying in the top quartile since May 2020.

The technical pictures of fund representatives for both the Netherlands and Sweden also reveal similar movements over the past few months. The iShares MSCI Netherlands ETF EWN has moved largely sideways between $47 and $50 since April after giving nine consecutive buy signals since early 2020. The fund most recently reversed higher after finding support for the third time at $47 to break a double top at $49.50 in late July, matching its all-time high from June. EWN has maintained a favorable fund score with a recent posting of 5.54, which bests the average non-US equity fund (3.12) as well as the average European equity fund (3.52). Weekly momentum also recently flipped positive, suggesting the potential for further upside from here.

The iShares MSCI Sweden ETF EWD has also moved largely sideways since April, reaching a high of $49 in June before moving lower later that month to $45.50. The fund has pushed higher over the past few weeks to break a double top at $48 before pushing higher this week to match its all-time high of $49. Despite the near-term improvement, EWD is in actionable territory with an intraday weekly OBOS reading of 38% Wednesday. The fund possesses a favorable 4.44 recent fund score posting and has also shown a recent flip to positive weekly momentum, suggesting the potential for further upside.

Both of these funds have been among the strongest relative strength countries in international equities for over a year, showed a period of consolidation, and have now shown a recent attempt at breaking out of their respective trading ranges. Those looking to add exposure to developed market equities may look toward either representative at current levels or upon potential movement to new all-time highs.

US Treasury yields have continued lower this week. The US Treasury 10YR Yield Index TNX reached 1.15% on Wednesday, where it has now formed, but not broken a double bottom. A move to 1.125% would mark a fourth consecutive sell signal for the index.

The US Treasury Five-year Yield Index FVX gave a second consecutive sell signal when it reached 0.625% on Wednesday, its lowest level since February.

The decline in yields has been a tailwind for many parts of the fixed income market. The iShares US Core Bond ETF AGG has completed three consecutive buy signals and currently sits one box away from giving a fourth, which would come with a move to $117. AGG’s fund score remains in unfavorable territory at 2.11, although it has improved significantly from the lows it reached in April.

Convertible bonds, high yield bonds, and inflation protection remain areas of strength in the fixed income market as all three groups sport average scores north of 3.0 within the Asset Class Group Scores. The general bond-long group has joined the upper tier of fixed income groups as it crossed above the 3.0 score threshold within the last week. It currently shows the second-best score direction among fixed income groups at +1.33, trailing only the US Government-long group which has a positive 2.05 score direction. The movement in yields has been a net positive for the fixed income market at large; at this time there are only six fixed income groups with average scores below 2.5, which places them in the unfavorable/red zone. The Inverse-Fixed Income group is now the lowest-ranking fixed income group with an average score of 1.36, reflecting the generally positive movement in the market recently.  

Remember, these are technical comments only. Just as you must be aware of fundamental data for the stocks we recommend based on technical criteria in the report, so too must you be aware of important data regarding delivery, market moving government releases, and other factors that may influence commodity pricing. We try to limit our technical comments to the most actively traded contracts in advance of delivery, but some contracts trade actively right up to delivery while others taper off well in advance. Be sure you check your dates before trading these contracts. For questions regarding this section or additional coverage of commodities email james.west@dorseywright.com.

Data represented in the table below is through 8/3/2021:

Broad Market Commodities Report

Portfolio View - Commodity Indices

As we discussed in a DALI update last month and briefly in our Were You Aware from Monday, energy-related equities are weakening, recently falling from second to sixth in our DALI sector rankings. However, several of the underlying energy commodities tell a different story, as highlighted in the charts below.

To begin, notice that the front month crude contract (CL/) remains in a discernable uptrend on three consecutive buy signals while the Energy Select Sector SPDR Fund (XLE) is in a consolidated posture and recently posted a lower top at $50. Similarly, we see the natural gas front month contract (NG/) trading on four consecutive buy signals, recently reversing back up into Xs yesterday, while the First Trust Natural Gas ETF (FCG) reversed down into Os and trades on consecutive sell signals.

To reconcile these charts, keep in mind that front month commodity contracts will (typically) be more sensitive to the current supply and demand story than equities. For example, OPEC’s latest decision to increase production affected the front month crude contract more dramatically than the equity-related holdings of XLE because equities are generally more forward looking. For natural gas, given the unusually hot summer temperatures experienced across the country, current demand levels are elevated, driving up the price of natural gas futures (among other variables). Although this certainly does not tell the full story, it can help us make sense of the disconnect between energy equities and commodities.

Relative strength is a measure of how a stock is performing when compared to something else, in this case the S&P 500 Equal Weighted Index (SPXEWI). Each day the stock's closing price is divided by that of the SPXEWI, the resulting numbers decimal is moved two places and then plotted on a Point & Figure chart. Whenever the relative strength chart shows a double top buy signal (e.g. RS Buy or Positive Relative Strength), it suggests the stock is likely to outperform the market for the foreseeable future. Conversely, whenever the relative strength chart gives a double bottom sell signal (e.g. RS Sell or Negative Relative Strength) it suggests the stock will under-perform the market. Relative strength signals tend to last roughly 18 to 24 months on average. Consequently, changes from buy signals to sell signals (and vice versa) are important to be aware of as they are longer-term implications of a stock's likely performance versus the indices. Using the Point & Figure chart along with the relative strength chart will allow you to better ascertain risk-reward and other trade management tools, but we always want to over-weight our portfolios toward those stocks that are on RS buy signals, giving us the best chance of outperforming the broader market.

In the Optionable Universe, this week we saw 15 relative strength buy signals compared to 9 last week. On the sell side, there were 25 relative strength sell signals compared to 32 last week.

Daily Option Ideas for August 4, 2021