Domestic equities have sharply headed higher over the last month and have now regained the top spot in the DALI asset class rankings, beating commodities by one signal. In yesterday’s featured article, “Bulls on Parade,” we discussed the run domestic equities have been on since their April low. With that in mind, today we’ll expand to a few other major asset class moves.
Domestic equities have sharply headed higher over the last month and have now regained the top spot in the DALI asset class rankings, beating commodities by one signal. In yesterday’s featured article, “Bulls on Parade,” we discussed the run domestic equities have been on since their April low. With that in mind, today we’ll expand to a few other major asset class moves.
Before we move on from domestic equities, there is one area to continue to watch moving forward, mega caps. For better or worse, these are the names that make up a sizeable portion of the exposure in equity benchmarks like the S&P 500 (SPX). Their strength or weakness drives broader market returns in this environment. A good representative of the mega caps is the Invesco S&P 500 Top 50 ETF (XLG). XLG broke a triple top to return to a point and figure buy signal in late April after getting close to its bullish support line earlier in the month. It is now one box away from testing old support at $49 where the downside movement started for mega caps in late February. So, the mega caps have retraced almost all their downside movement from their initial breakdown. The next level of resistance is at all-time highs at $51. A failure up here would set up a long-term head-and-shoulders pattern. While this isn’t a traditional point and figure pattern, it shouldn’t be ignored if it comes to fruition. XLG has held an acceptable fund score since March 2023, so it would be prudent to watch out for any drops below the 3.0 threshold moving forward.
One key market barometer that has not retraced its downside move is the US Dollar (DX/Y). The US Dollar still trades on three consecutive sell signals and is in a negative trend. While it has reversed back into Xs in May, DX/Y is trading near multi-year lows in the low 100s whereas it peaked earlier this year at 110, its highest level since 2022. With the US Dollar's current technical weakness, there is still a favorable back drop for international equities and other asset classes that benefit from a declining USD. Secondly, the weakness in the USD correlated with weakness in US equities and while it’s not a one-for-one relationship, it’s something to keep in mind moving forward.
Lastly, yields moved higher in May while most of the recent rally saw rates and domestic equities inversely correlated. With positive inflation data coming in Tuesday morning, interest rates still headed higher with two Fed cuts priced in for later this year. The US Treasury 10YR Yield Index (TNX) is nearing 4.5%, which has spelled issues for domestic equites over the past few years. Intermediate- and long-duration bonds remain areas of weakness that should be avoided despite TNX struggling to stay above 4.5% for an extended period. Short-duration bonds still offer similar yields with less volatility, thus making them more attractive at this time. Overall, the recent rally in domestic equities is encouraging following the sharp downside action earlier this year. However, other asset classes are still showing signs of caution or at least that a return to pre-March market conditions have yet to materialize. Domestic equities have regained the top spot in the DALI rankings, but the broad asset classes are more bungled together than they were entering the year, so there could be more shifts to come.
