The last few weeks of market action have led to some changes in momentum among the size & style breakdown on our Asset Class Group Scores (ACGS) rankings. As a refresher, the ACGS page features 134 groups that are meant to represent the various investment areas for all the ETFs and mutual funds tracked on the NDW system. Each fund is assigned a technical fund score, ranking from 0 (worst) to 6 (best). We then average the fund scores of the representatives included in each group to generate a score for the broader classification. These group rankings are meant to provide a more nuanced view of the technical posture for the total investible fund market.

We can use the US Styles view filter to condense the list of classifications down to the major size & style representatives. This ranking still shows US Large Cap Growth at the top of the rankings at an average score of 4.32, sitting just behind the S&P 500 Index Funds group, which has a score of 4.81. Both of those scores backed off slightly from relative score peaks throughout the near-term weakness in April, but they continue to be among the strongest groups on the entire ACGS system. It is interesting to note that all of the groups representing the nine size/style boxes have elevated fund scores; even the “lowest” score from Large Cap Blend still sits at a respectable 3.79 posting.

Sorting these groups by Direction reveals a slightly different picture. The score direction reading displays the numerical move from a score high or low over the past six months. Like the Group Score, we then average the score directions of each underlying constituent together to arrive at the reading for the entire group. Put simply, the Direction is just meant to tell us if the score is currently rising or falling, and what the magnitude of that move has been.

US Micro Cap shows the highest directional move at a 2.10 average score direction. From there, we see the three small cap representatives showing the next highest score directions, followed by Mid Cap blend and Mid Cap Value, then Large Cap Growth. Even though US Large Cap Growth still has the highest fund score, it shows the lowest score direction out of the equity groups included in this view.

Asset Class Group Scores - US Styles Score Direction Ranks

Rankings a/o 5/9/2024

This view of near-term movement shows a much different picture than what might be expected when examining the score rankings independently. Areas that lagged the broader market throughout much of last year have maintained higher directional readings than the leaders. This does not mean that we should be fearful of decaying leadership from the current areas of strength, as the scores of the S&P 500 Index Funds group and US Large Cap Growth have remained consistently high. Rather, we should consider it a positive to see other areas of the market improving as this provides a more solid technical foundation for the broader domestic equity space.

Sentiment follows price. When stocks go up people get more optimistic (bullish) and when stocks go down people become more pessimistic (bearish).

When we last had an investor sentiment discussion in March most of the readings were at multi-year highs - which makes sense because the S&P 500 (SPX) was going on five consecutive months of gains. At the time, 50% (four-week average) of American Association of Individual Investors (AAII) respondents thought the market would be higher six months later…which was a multiyear high/euphoric reading. Also in March, we saw the National Association of Active Investment Managers Exposure Index (NAAIM) move above 100%, signaling levered long equity exposure. Note that this was the highest reading since November 2021.

So, you could safely assume that there were some (justified) concerns about market extension and frothy behavior. Then April happened…the Russell 2000 (RUT) dropped 7%, the Dow and Nasdaq each lost 5%, and the S&P 500 fell over 4%. Given that sentiment follows price, naturally we saw a decline in feelings of euphoria and frothy market conditions.

Prior to the pullback in April, you could have argued that investor sentiment was acting as a headwind. Today, the bull herd has been thinned which alleviates the euphoric headwinds – a positive as long as the bulls don’t keep leaving.

One specific example: “The Jefferies Equity Product Management team recently pointed out that while performance following moves in the AAII bull-bear spread into negative territory is poor in the initial one to three weeks, the +12M performance is actually better than typical for the SPX” (Source: FactSet).

We came across the table below on Twitter earlier this week and think it provides a nice summary of the various sentiment reading shifts over the past month. Another more recent development is today’s Michigan Consumer Sentiment Survey which showed a continued plateau (Source: advisorperspectives.com).

Of course, sentiment is closely tied to the major equity indices like the S&P 500, Dow, and Nasdaq – they are what people see most often - like how gas and food prices tend to heavily affect consumer sentiment/behavior because people see them all the time.

However, over the past month, we saw more than just a top-line pullback. Beneath the surface most stocks, in most sectors, experienced some technical softening which contributed to a more substantial sentiment reset than a routine 5% exhale would suggest.

Below we have four distribution curves. On the left-hand side, we are showing the percentage of stocks trading on a Point & Figure buy signal in each sector. The black outline is intended to show the disparity above the 50% threshold. At the end of March (upper left) over 20 groups had at least 50% of members trading on a buy signal. To start May (bottom left) just 11 remained.

On the right-hand side, we are showing the % of stocks trading above their 50-day moving average, in each sector, at the end of March (upper right) and at the start of May (bottom right). At the end of March ALL sectors but three had 50%+ stocks trading above their 50-day moving average. The start of May was clearly a different story. Summertime Blues?

Some of these readings have again shifted higher this week but remain far from March levels. Yesterday’s (5/9) AAII Sentiment Survey data is a good example. By no means are we saying that there was a washout or anything worthy of employing “mean reversion” tactics, but we are saying that there seems to have been a meaningful reset in investor sentiment at both a macro and micro level…enough for the euphoric headwinds to die down.

Portfolio View - Major Market ETFs

Additional Comments:

Small and Mid Caps have led their Large Cap counterparts since last Friday’s close, with IJR and IJH up 2.27% and 2.26%, but the notable chart action this week occurred on the chart of the SPDR S&P 500 Trust SPY.  The fund has gained 1.74% through this week’s action and reversed back into Xs at $520 on its default point and figure chart Thursday. This places a much needed level of support at $495 on the chart for SPY which is closer to current trading levels. The reversal provided somewhat of a near-term uptick in fund score, bringing SPY up to 4.25 - though the fund is still off its recent peak score at 4.58 from mid-March. The reversal into Xs brings SPY to actionable territory on the chart and could be considered by those seeking to increase broad market or large cap exposure. While the recent performance within Small and Mid Caps have been notable and should continue to be monitored, the relative strength leadership remains with Large Caps at this time. Bear in mind that the SPDR Dow Jones Industrial Average ETF DIA still resides in Os on its default trend chart, while the Invesco S&P 500 Top ETF XLG reversed into Xs last week and sits at $42.  

Though emerging markets are flat to slightly negative through Thursday’s action, developed markets have continued higher with the iShares MSCI EAFE ETF EFA adding 1.6% (5/3 – 5/9). On the default chart, EFA moved above $80 during Thursday’s trading to match the March rally high and a resistance level that dates to the beginning of 2022. EFA maintains a fund score of 4.09, which is stronger than the average score for a Non-US fund (3.53), and is coupled with a positive score direction north of 1, speaking to the fund’s near-term improvement. Those who may be seeking international, or more specifically developed markets exposure, can consider EFA here. A move above $81 would be a second buy signal and new multi-year high for the ETF, but bear in mind, the all-time chart from 2021 resides at $82. From here, initial support lies at $76, while the fund’s October 2023 chart low sits at $66, just above the bullish support line at $63.

Daily Option Ideas for May 10, 2024