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Bullish Outlook Intact; Mild Concerns Subside

The action we are seeing in broad indexes, Sectors, and in market dynamics continues to support our overall bullish outlook. Additionally, the mild deterioration in market dynamics that we discussed the past two weeks is now much less of a concern.

  • S&P 500. The major averages are hitting new all-time highs; and new highs are bullish. Key support levels we are watching on the S&P 500 include short-term support at 3870, with the next important support levels coming in at 3840, 3750, 3694, 3635, 3588, and 3550. A break below the 3694 level would signal a loss of short-term upside momentum, however as long as 3550 holds we want to buy dips… see chart below.
  • Sector Relative Strength Rankings & Weighting Recommendations. Cyclical Sectors remain leadership while defensives (Staples, Utilities, Real Estate) remain in RS downtrends — precisely what we would expect to see in a bull market.
  • Mild Concerns Subside. Over the past two weeks we highlighted some early signs of deteriorating market dynamics which led us to a slightly less bullish outlook, noting that if deterioration continued, it would likely lead to a deeper pullback for stocks. It turns out that the deterioration in market dynamics was short-lived as (1) the 10-year Treasury yield held above the key 0.97-1.00% support level, (2) the US dollar (DXY) was unable to sustain a breakout above 91, let alone 92, and (3) RS has deteriorated for defensive areas (REITs, pharma, Utilities, and Staples). We mentioned in our 1/26/21 Compass that these deteriorating dynamics could prove to be nothing, and that is exactly the case. Still, these remain important metrics to monitor going forward… see chart below
  • Small-Caps & EM Equities Remain Leadership; High Yield Spreads At New Lows. Small-caps (Russell 2000) are hitting new price highs and continue to outperform relative to large-caps (S&P 500). We are seeing the same thing happening with EM equities.  Additionally, high yield spreads have narrowed to levels last seen in 2018. These are three clear risk-on signals that help us arrive at our overall bullish outlook.

Source: FactSet

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