Cap Weighted names have done quite well coming off of 2025 lows. How can you use Relative Strength to take advantage of Opportunities?
Beginners Series Webinar: Join us on Friday, May 30th at 2 PM (ET) for our NDW Beginners Series Webinar. The week's topic is: Fund Score Composition and the Asset Class Group Scores Page. Register Here
As we sit on the cusp of June, major market representatives are teetering back and forth between a positive and negative year. Through 5/28, SPX is up just .12% so far this year… markedly better than lows for the year but certainly below long-term averages and a poor follow up to the back-to-back 20%+ gains in 2023 & 2024. The beauty of relative strength is that is can be used in many different market environments and isn’t solely dependent on things being “good” or “bad.” For example, the simplest example of an asset earning positive relative strength is helping your client find the asset that advances 25% when the market is up 15%. The flipside is also true- identifying which asset will decline just 5% when SPX slips 15% is worth its weight in gold. When markets are more muted in their performance, finding ways to squeeze out a few percentage points of an otherwise uneventful market period can be the difference in entering a mid-year review being able to show your client they beat the rate they could have gotten in a high yield savings account. Point being, utilizing relative strength is applicable across a variety of different scenarios.
The analyst team utilizes a seemingly endless list of relative strength tests to put together day to day research. From sector & stock comparisons to tests spanning across asset classes, there are a handful which the team will utilize above all else. When it comes to cap-weighted vs. equal-weighted allocation, we can utilize a sensitive 1% scale between SPXEWI & SPX to help guide our hand. After all, understanding if it is a core-driven market or one more widespread in its advances can help us properly allocate to those key parts of the market earning positive relative strength. With action on 5/28, this RS chart reversed down, favoring SPX. This chart now shows a long-term preference for SPX (via the consecutive sell signals since August 2023) and the newly established near-term control for cap weighted names coming off of 2025 lows. As we typically look for, this chart is historically consistent- following both a RS switching (owning whichever asset is on a buy signal) or column switching (owning whichever asset is in a column of X’s) beats a simple buy and hold strategy since the early 1990’s.
As a quick wrap-up, we will offer a brief technical comment on RSPT, the Invesco S&P Equal Weight Technology ETF. Like its cap-weighted counterpart XLK, the fund broke back into a positive trend with May’s action, marching towards resistance clustered around February’s all-time highs before backing off that level. Scoring above both the average broad US or focused technology fund on the asset class group scores page, RSPT has improved quite notably but bulls should still be cautious of heavy resistance right above current levels. In the near-term, interested parties could watch $36, the nearest point of old resistance. From there, a defense of the middle of the trading band at $34.50 would be the next point of interest before falling down to traditional support and the bullish support line in the low $30’s.
