The home construction group has rallied to new highs following softer than anticipated CPI data and strong earnings from the largest home builder D.R. Horton (DHI). In the last two weeks, the bullish percent for the home construction group has increased from 32% to 84%. Movements of that magnitude are quite rare, with only three years since 1995 in which the Bullish Percent added fifty percentage points in two weeks: 2008, 2019, and 2020. Even gains of forty percentage points are uncommon, as there have only been eight other years with such instances.

Home construction is considered a leading indicator, meaning its performance often precedes the overall economy. Consequently, we might expect increasing participation from homebuilders to foreshadow a strengthening market. Looking at forward returns when the Bullish Percent for Home Construction adds forty percentage points in two weeks, we find that the S&P 500 experiences above average returns, especially ninety days forward, as seen in the table below. Specifically, the market is up almost 90% of the time three months out, with average returns of 9.1%.

Arguably the most significant instance of a forty percentage point BP gain came in 2008, which saw a market decline of over 35% a year later, but more recent returns look quite different from before the financial crisis. Following BP gains of forty percentage points since the recession began to cool in 2009, the average one-year forward SPX return is 23.3%, the minimum one-year return is 16.7%, and 100% of instances saw positive returns after one month. Forward returns are even stronger for iShares U.S. Home Construction ETF (ITB), as the average one-year forward return is 24% – even including 2008. Most notably, three-month forward returns have been positive for ITB after every instance, averaging a 17.6% return. Since 2009, ITB’s performance has been even more impressive, with an average one-year forward return of 52%. In general, significant increases in home construction breath has been a positive sign for future performance.

That said, returns are highly volatile across all periods following those forty percentage point BP gains, and include the seismic drawdown of 2008. After said BP gains, the standard deviation of SPX one-year forward returns is 34%, around double the average of 17% for SPX since 1995. Returns are also skewed by the momentous performance following the COVID-19 plummet in March of 2020, so take performance numbers with a grain of salt.

Regardless, ITB is a strong name to consider, carrying a near-perfect 5.82 fund score, recently breaking through all previous resistance to return to a buy signal. Additionally, the homebuilding group sits at first place in the group sector matrix rankings and has remained at the top spot since November of last year. Support does not start until $97, but prior resistance lies higher at $116 and $112, which can now be thought of as future support. However, those looking to add exposure should note the fund’s slightly overbought (OBOS) reading above 60%, as well as the potential for increased market volatility, if past trends persist.

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The crypto space had an uneventful last week from a pure performance perspective. A handful of coins within the Nasdaq Crypto Index (.NCI) found themselves slightly in the red while larger coins, namely Bitcoin ($BTC) and Ethereum ($ETH) posted small weekly gains. For the most part, technical pictures within the crypto space remain largely in limbo. Bitcoin’s recent rally is constructive but several other coins have broken down to significant levels of support. All in all, continue to exercise caution as you look towards investable options within crypto.

While performance metrics were somewhat muted, this week did bring the launch of several spot Ethereum ETFs to the market. This follows a slew of spot Bitcoin ETFs to open in 2024, which is typically considered a positive sign as access to crypto increases for open markets. On the first day of trading, spot Ethereum ETFs saw over 100 million net inflows, let higher by Blackrock’s ETHA. From a technical perspective, $ETH is in the middle of a notable line of support established below around $2,850 and a range of resistance up above around $3,800-$4,000. While more constructive than other coins which have moved notably lower, a third failure to breech these highs could spell further weakness for the coin.

Each week the analysts at NDW 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.

Check out this week's Major Index and DALI Overview (3: ).

After being only one of two indices to finish in positive territory last week, the Russell 2000 Index RUT again leads all US equity indices this week. In last week’s DALI feature, we noted where small caps, through the iShares Russell 2000 Index IWM, had begun to show improvement from a relative strength (RS) standpoint against other asset class ETF representatives. The continued outperformance by small caps this week has brought further developments in RS as the switch between international equities and commodities in DALI was ultimately caused by small caps' improvement against representatives from the two asset classes. Additionally, the RS in Xs for the S&P Small Cap 600 Index ^RSXSPSML reversed back into Xs following Monday’s action providing evidence on the individual stock level of the space’s positive near-term RS. For those not familiar with the RS in Xs indicator (RS in Xs (^RSX)), it measures the percentage of stocks (or ETFs/mutual funds) that are in a column of Xs on their market RS charts against the S&P 500 Equal Weight Index SPXEWI. Recall that when a market RS chart resides in Xs it means the stock is exhibiting a near-term trend of outperformance over SPXEWI, and with the reversal into Xs on the RS in Xs for the S&P 600 ^RSXSPSML chart, it indicates an increase in stocks showing those near-term trends of outperformance.

The table below breaks down those stocks by broad sector within the S&P 600 currently maintaining positive near-term market RS. The percent of total sector constituents is shown to provide a gauge for what broad sectors are contributing to the near-term increase in RS. The last two columns of the table show the number of those stocks with RS charts in Xs that maintain RS buy or sell signals, providing a barometer for how many stocks have shown or may be poised to show long-term positive RS against the market. Below are highlights from the data.

• As the RSXSPSML indicator shows, 52% of the stocks within the small-cap index exhibit positive near-term RS.
• Financial and Industrial provide the highest number of stocks and have more than half of the index constituents showing near-term positive RS. Financials have seen an increase of 30% since the beginning of Q3 in stocks exhibiting positive near-term RS.
• Technology, Basic Materials, Healthcare, and Communications are additional broad sectors with more than half of the constituents in the index maintaining positive near-term RS. Meanwhile, Consumer Cyclical, Energy, and Real Estate have just under half the index constituents showing positive near-term RS. Since the beginning of Q3, Technology, Basic Materials, Healthcare, and Real Estate have seen at least a 5% increase in stocks exhibiting near-term positive market RS.
• Consumer Noncyclical and Utilities continue to maintain a low percentage of stocks exhibiting near-term RS. Utilities have seen a slight uptick in stocks showing positive near-term RS, while Consumer Noncyclical is the only sector to have seen no additional stocks within the small cap index to show positive near-term market RS.

Within the Invesco small cap sector ETF lineup four sectors have exhibited or recently seen a change in near-term relative strength against the S&P 500 Equal Weight Index SPXEWI.

The two small cap sector ETFs that have seen recent changes to near-term RS are Financials PSCF and Technology PSCT as both reversed into Xs on their market RS charts during last week’s trading. Before the reversals back in Xs, Financials had been in Os since March this year while Technology had been in Os since December last year. While each ETF still resides on an RS sell signal, favoring the SPXEWI in the long term, recent action has brought the market RS chart of PSCF to within one box of an RS buy signal. Both ETFs possess acceptable fund scores with Financials PSCF registering its highest score since late-2016 at 4.61. PSCF currently trades at a multi-year high and in overbought territory, so those seeking exposure to the ETF are best served looking for price normalization at current levels or a pullback before adding. After reaching a multi-year high early last week at $51(one box below the all-time chart high), PSCT pulled back to $48.50 and actionable territory on the chart.

Industrials PSCI and Materials PSCM are the two additional small cap sector funds showing positive near-term market RS. Each ETF has also maintained a market RS buy signal, showing positive long-term RS, and traded in a positive trend on the default trend charts since 2023. The funds possess strong scores near 5.5 and currently trade at all-time chart highs. PSCI returned to a buy signal last week by completing a shakeout pattern while PSCM has maintained a buy signal since December last year. Those seeking exposure to PSCI may look to add on a pullback to the mid-$120s, while PSCM is actionable at current levels.

U.S. Sector Updates

The past week saw no significant technical developments in the Basic Materials, Energy, Consumer Staples, or Healthcare Sectors. Those that saw noteworthy movement are included below, in order of their relative strength ranking in the DALI domestic equity sector rankings. Sector designations are based on DALI sector rankings and are as follows: 1 - 3 overweight, 4 - 7 equal weight, and 8 - 11 underweight.

International equities saw declining relative strength over the past week, leading the asset class to fall from second to third in our DALI rankings. This relative weakness was more a result of the rapid improvement in small caps than it was deterioration in foreign stocks, as we cover in today’s Major Index and DALI overview. Still, the relative strength picture for international equities is, at best, uncertain. We have seen the asset class remain close with commodities in our DALI rankings for weeks. The broader space has been unable to show further follow-through to the upside after brief periods of improvement. This makes it more important to focus on favorable areas within the asset class that have separated themselves from the field.

Once such area is India, which just moved back into the top ten ranked countries in our NDW Country Index Matrix Ranking this week for the first time since December 2022. We have also seen India sit near the top of all 134 groups on our Asset Class Group Scores (ACGS) rankings for several weeks (currently third), and it is the only non-US group with an average score north of 5.00.

Most of the cap-weighted India funds have pulled back slightly from all-time highs over the past week, potentially offering an opportunity for those looking to add exposure. This includes the Franklin FTSE India ETF FLIN, which pulled back on its ¼ point chart from the all-time high of $41 down to $40, just above the mid-point of its trading band. This fund has shown consistent improvement for over a year and currently sits on two consecutive buy signals on the ¼ point chart after rising over 14% so far through 2024. Those looking to add exposure toward India may consider FLIN on this pullback, with initial support offered at $39.25. Further support may be seen at $36.25.

Weekly Fixed Income Update Video (2:13)

The 10-year US Treasury Yield Index (TNX) gave a third consecutive sell signal and violated its trend line last week, putting it back in a negative trend for the first time since April.

The Treasury yield curve has steepened recently as intermediate-term yields have fallen faster than long-term yields. The two-year/10-year spread is now the least inverted it has been since February. Long duration fixed income currently ranks above short-duration in the Asset Class Group Scores (ACGS) fixed income rankings, but with long-terms yields appearing to be more buoyant, short-term bonds currently may offer the better risk-reward profile.  

The fed futures market is now pricing in a 100% chance of a September rate cut. On Friday, we’ll get our last look at inflation ahead of the Fed’s July meeting when the June PCE report is released. Assuming no uptick in inflation, FOMC members could use this meeting to signal their intent to lower rates in September.

The inverse fixed income group now has a -1.76 score direction, the second lowest score direction of all 134 groups in the ACGS system. The inverse group’s deeply negative score direction speaks to the recent improvement in the US fixed income market; however, many US core groups still sport less-than-ideal fund scores. Other than this, the fixed income rankings look largely the same as they did a week ago.

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 will.gibson@nasdaq.com.

Data represented in the table below is through 7/23/24:

Broad Market Commodities Report

Portfolio View - Commodity Indices

Weekly Commodities Video (2:27)

Precious metals climbed to the top of our commodity rankings on DALI for the first time since April of this year. As expected last week, gold (GLD) and copper (CPER) were two of the primary reasons for this shakeup. Over the past seven days gold lost 2.5% yet copper fell 6.4%. Over the past 30 days, copper has lost over 5% while gold has gained nearly 4%.

The extreme performance bifurcation pushed copper to a relative strength sell signal against gold. As seen on the chart below, the relationship typically “trends” quite well – meaning that relative strength buy signals usually led to more relative strength buy signals, and vice versa for sell signals.

In hindsight, the May 2024 buy signal was different because there was no follow through to the upside for copper...which is rare. Interestingly, the only other time in the past two decades where we saw no signal follow through was May 2010.

That said, the direction of this relationship seems muddy right now; however, bulls should like to see this turnaround quickly in favor of copper as further explained here.

Daily Option Ideas for July 24, 2024