The S&P 500 Index SPX closed lower for the second consecutive week, having fallen about 2% from its all-time closing high of 5,254 on March 28 to around 5,150 at the time of this writing Friday (4/12). This has not even been enough of a decline to cause the default chart of the index to reverse down into a column of Os, which would come with a potential move south of 5,100. While losses are never ideal, seeing the broad market benchmark consolidate is a perfectly normal occurrence, and can often be healthy for future growth. However, seeing lower prices naturally brings concerns around how long the declines will persist. Today, we will examine notable support levels for SPX to keep on the radar as reference points, hopefully alleviating fears of eminent weakness on the horizon.

The current technical picture for the S&P 500 has seen consistent improvement, with the default chart giving six consecutive buy signals. That movement started at the beginning of November last year, when we saw the sharp reversal from the October correction led SPX to continue higher in a single column of 32 Xs, notching one of the largest single columns we have ever seen. When the market was on such a significant stem, we did not have any recognizable support levels to look toward if things had turned around. Luckily that was not necessary, as the consistent demand continued throughout the first quarter of 2024. The more recent action has left a healthier chart, with recognizable support levels that have stemmed from brief pullbacks before further appreciation. Initial support on the default chart for SPX sits at 4,940, which would be a decline of about 6% from the all-time high at 5,250. Further support from there can be seen at 4,860, which would be a decline of about 7.5%. We have not seen a 5% pullback in SPX since September 21, 2023, which is 204 calendar days. This is almost twice as long as the average days between 5% pullbacks historically since 1928. Furthermore, the typical 5% pullback sees a decline of about 2.74%, on average, after the 5% threshold is breached. So, if we did see further consolidation down to the initial support levels, that would be consistent with normal market pullbacks over the last century.

Further support from those levels can be seen in the 4,720 to 4,700 level, which would be about 10% off the March all-time highs. We are certainly not saying that we are expecting the S&P 500 to trade down to that threshold in the near-future, or even that we are going to trade down to the initial support levels mentioned above. Instead, we are merely pointing out that the consistent support offered provides a sounder technical backdrop for the improvement so far this year.

Real Estate is still a hot topic on Main Street. Anecdotes about home prices, mortgage rates, bidding wars, and home equity are still frequent dinnertime conversations. Almost by default, if someone says they bought a house (or any property) a few years ago the internal response is, “Wow, that must have been a great investment.” However, if someone on Wall Street says they bought Real Estate stocks a few years ago, the internal response is not the same; in fact, the thoughts are probably opposite.

Since the S&P 500 bottomed in October 2022, the Real Estate Select Sector SPDR Fund (XLRE) has produced a total return of about 15%...which is pretty dismal given the S&P 500 is up about 45% over the same timeframe. To make matters worse, Technology (XLK) and Communication Services gained 70% over the same period and Industrials (XLI) are up north of 40%.

Admittedly October 2022 is a relatively short lookback period, but the story is the same over the past five years. From April 2019 to April 2024 XLRE has gained 22% including dividends…that is the worst return of the 11 major SPDR sector funds by far. For reference, the S&P 500 is up almost 100% since April 2019. So, you could argue that there is a significant bifurcation in Real Estate “sentiment” between Main Street and Wall Street.

Not coincidentally, the Real Estate sector has scored below 4.0 on our Asset Class Group Scores page consistently since November 2019. The low technical score simply reveals that most Real Estate ETFs and Mutual Funds have not performed well on an absolute or relative basis.

We could end our piece with the chart above, but that would not be most helpful. We could also try and extensively explain why this has been the case (interest rates, demographics, COVID, etc.) but that is not the intended takeaway either.

Avoiding technically weak sectors for prolonged periods is extremely important, but we also recognize that many portfolio managers have strategic sector diversification mandates. Furthermore, with interest rates ticking higher this week and rate cut expectations dwindling, some investors may want high-yielding Real Estate stocks due to bond prices treading water (if not outright falling). So, let’s look at some technically plausible options.

Perhaps not surprisingly, Residential REITS are currently one of the stronger subgroups. As of yesterday (4/11), 70% of names traded above their 50-day moving average (^TWECRESIREIT), and nearly 60% sat on a Point & Figure buy signal (^BPECRESIREIT). Another subgroup with strong stocks is Leisure. As of Thursday, 62% of names traded above their bullish support line (^PTECLEISREIT), and 56% sat on Point & Figure buy signals (^BPECLEISREIT).

To locate these strong citizens, consider using the detailed subsector search tool within the security screener. We found the below stocks through this process:

Those who prefer to use funds also have a couple of good options. In the Residential camp there is the Residential REIT ETF (HAUS). The ETF currently carries a fund score above 3.0 and recently (on Tuesday) matched its chart highs from February 2023. Although overextended at the moment, the weight of the technical evidence is positive and a breakout to $17.25 would provide additional bullish confirmation.

Another technically sound idea is the Global X Data Center & Digital Infrastructure ETF (DTCR). The fund carries a score above 4.0 and recently pulled back to the middle of its ten-week trading band, offering an attractive entry point. For what it’s worth, notice that DTCR was in a multiyear downtrend (traded below its bearish resistance line) until November 2023 before breaking out to the upside.

There are usually strong stocks/funds in weak sectors, it just takes more patience and diligence to seek them out. By definition, this is where and when active management (i.e., not passively owning everything) can really add value.

Portfolio View - Major Market ETFs

Featured Chart: Invesco S&P 500 Equal Weight ETF (RSP)

This week’s declines saw several funds reverse down into O’s on their default charts. While the overall technical posture of said funds is still strong, perhaps the most important area to monitor as we journey into the second quarter is equal-weighted assets. Small-caps have struggled recently, so a major battleground for increased domestic participation could come from the “average stock.” Take for instance Invesco S&P 500 Equal Weight ETF (RSP), which reversed down into O’s with today’s action. Now at the middle of the trading band, bulls will look for a reversal back into X’s to act as a confirmation of positive action and establish near-term support. Past this, old resistance could come into play as new support around $154.

Additional Comments:

A number of other funds moved lower over the last week. Namely, DIA and IJH reversed back into O’s. QQQ is near a reversal, without technical support for quite a while on its default chart. Make sure to check in on more sensitive scales to look for near-term price battlegrounds across the board. 

Daily Option Ideas for April 12, 2024