Deteriorating Breadth Period of Transition

$SPX continues to make new ATH as 50 Days MA acted as the support for a strong comeback, which we have seen over past couple of months.  Despite positive macro environment, improved sentiments and vaccination drive improving worldwide, we have seen some shifts in few sectors in the broader market in terms of price and its strength.

While the 1H of 2021 was strong with Industrials, Energy, and Financials leading, we have seen underperformance in Consumer Discretionary, Technology, Materials, Cyclical and Defensive, and Utilities on relative basis for first half of 2021. The month of June and early few weeks of July saw some deterioration in the breadth of the market and a sharp pullback in select few spaces which has changed some narrative making the breadth narrower and underperformers were seen gaining traction. 

We are now seeing a visible change in value stocks which were favoured for the entire first half of 2021 and growth stocks outperforming the S&P 500.

Ned Davis Research, in its Model Update, has seen deterioration in Value sectors while growth sectors continued to see improvement except Healthcare. Energy and Technology were only overweight in June. Healthcare is the lone underweight.

Broader market is seeing strong gains with $INDU, $SPX and $COMPQ all now at new all-time highs. As large cap gains with FANMANG outperforming, Small Cap and Mid-cap remains range bound.

Sector ETFs

RRG Chart for S&P500 Sector ETFs

RRG Charts clearly show Real Estate and Communication in leading quadrant while the Technology; healthcare and consumer staples are in improving quadrant.  Given the recent cut in Financials, Energy and Industrial space, they are in weakening quadrant.  Consumer discretionary select is now showing positive sentiment as it transitions from Lagging to improving quadrant.

Stocks that are in focus from these select spaces

Paycom Software is SaaS Company providing employment life-cycle management for businesses. Technically, this stock is in uptrend making higher highs and higher lows. The stock has seen a strong support at 100 MA while it has now closed above its 20 MA. The 100 MA trend continues to point upward while this dip was seen as a dip with prices reclaiming its 20 MA. The RSI is above 50 on weekly scale indicating the strength in prices. Ratio chart of PAYC/SPY is above 20 moving average indicating some strength in the stock. We believe PAYC can be an outperformer in short to medium term.

Salesforce is another stock from Technology space which is in our watch list as prices have given a strong bullish price action in last few weeks. A Flag Pattern breakout is seen, a bullish continuation pattern that tells us that there is much higher upside in stock. The pattern has formed over a period of one year and we have seen its breakout recently in prices. Stock is sustaining the 20 MA on weekly which is now pointing the trend on upside. The Ratio chart (CRM/SPY) of the stock is now above 20 MA while the 14 period RSI is also above 50 keeping our bullish bias valid. We expect CRM to continue the uptrend and inch towards its all-time highs of 280 while the pattern target for the stock is above 300+.

TSLA is one of the stocks which we have been following and recommending since lower levels of 240. For now the stock is off the radar but has now made it in our List. A brief consolidation was seen after prices inched to 900 levels. RSI is hovering around 50 levels which indicates sideways momentum in price for the short term but we are keeping this stock on radar given a potential breakout is in offing. We would be critically watching 720 levels on the upside for confirmation on the long side. A break below 550 will send this stock in a deeper correction towards lower levels of 400-390. Ratio chart shows short term improvement in the stock as compared to the benchmark but we need further confirmation in price action.

About the author: Lovelesh Sharma, CMT is in financial markets for over 10 years practicing Technical Analysis. He has been in various roles, from Analyst to Managing the Research Desk, where he was looking after various styles of Trading. He has managed various Trading portfolios which were diversified in various strategies such as Mean Reversion, trend following and Short term Momentum Trading. His proficiency is Technical Analysis, Price action and Non-Discretionary Trading and has been applying the same extensively in Indian capital markets, commodities and Currency markets. He also has
experience in international markets including US equities, Singapore and Malaysian equity markets.

A professional who believes “A Chart is worth a Thousand Words”, specializes in Non Discretionary Trading, Technical Analysis, Inter-market analysis and identifying momentum to generate alpha with risk management. He considers Market/sector rotation, Timing  and Position Sizing and employs Technical analysis to identify the same. He is adaptive and flexible in approach when it comes to markets.  He gauges the market structure through market Breadth and sentiments.

He has also cleared Chartered Market Technician, A coveted certificate in the field of Technical analysis. His Academia includes MBA Finance, Certified Investment Adviser, and has been MCX Certified Commodities Professional and  AMFI certified Mutual Fund Advisor.

He is actively involved in conducting Investor Education & awareness webinars. He has appeared on various business channels like Zee Business, NDTV Profit, and The WION.  His articles and views have been published in leading financial publications. His views have also been published in Asia’s  prestigious Nikkei Asian Review.

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