Today, I answer your questions concerning where the market goes from here.
A quick review: The SPX dropped 35% and bottomed on March 23. Since then, it rallied 35%. For the SPX to rally back to the previous 3393 high, it must rally close to 20% from here.
In the past, I stated I was not looking for a V-shaped recovery. I am looking for a U-shaped recovery as the best-case scenario. Depending on the next shoe to drop, it is very realistic to see a W-shaped recovery with the SPX testing the previous low at 2191. The important question is not what shape the recovery will be, but it is important to figure your strategy for each. For those near or in retirement, "it always comes back" is not a wise strategy.
A word of caution, not all securities trade in lockstep with the SPX — many underperform and some outperform the market. At this point, the SPX can do one of three things: Go up, go sideways or go down (see slotted lines).
The current pattern is similar to what the SPX did during previous recessions during previous timeframes, drop then rally. The biggest difference is the speed of this drop and retracement.
Those with long positions are hoping the markets retrace to at least their previous highs, then breakout. Investors with dividend-paying positions are looking for a sideways or down market so their dividends can buy additional shares. Those who are short on the market are looking for the market to test previous lows since they make money when the markets go down. The fourth group, those sitting in cash, are hoping for another drop to buy targeted securities at lower prices.
To help determine market direction, I designed a chart of the main market sectors, beginning on March 24, the previous market bottom. This chart shows the relative strength and performance of each sector in comparison to the strength of the market.
Bulls wanting the rally to continue need to see the majority of the sectors trading above the SPX, outperforming the market. The bears need to see more sectors trading below the SPX, especially the financials, underperforming the market.
The main US sectors and their relative strength are as follows: Energy, 51.59% (black line), Health Care, 32% (red line), Technology, 30.44 (orange line), Materials, 29.91% (green line), Consumer Discretionary, 38.49 (purple line), Utilities, 22.32% (grey line), Industrials, 21.08% (brown line), Consumer Staples, 17.27% and the Financials, 16.99% (purple line). The SPX return (green line) was 26.04%.
In conclusion, five sectors outperformed the SPX while four sectors underperformed. The weakest sector, the financials, is not good for the bulls. Why? I have never seen a prolonged market rally without the support of the financials. Also, since the financials are the laggard of the group, this shows there could be overall market structural problems.
For our final step, let's analyze the top U.S. financial institutions to see how many are outperforming and underperforming the SPX since the previous market bottom on March 24.
The largest U.S. institutions relative strength is as follows: Morgan Stanley, 34.18% (blue line), Goldman Sachs, 27.29% (orange line), Citigroup, 15.94% (purple line), Bank of America, 15.43% (green line), J.P. Morgan-Chase, 7.43% (pink line) U.S. Bancorp, 3.01% (black line) and Wells Fargo, -7.87%, (red line). Only two institutions outperformed, while five underperformed the market. The SPX market performance during this timeframe is 26.04%. This is very bearish. Also, the two laggards, U.S. Bancorp and Well Fargo, look extremely weak and show more downside ahead. For those wanting to trade any of these securities, go to the previous columns to see the Simple Simon buy and sell signals.
With the underperformance of these banks along with the entire financial sector, I see further downside ahead with the entire market. This weakness shows there are more structural problems, and not just because of COVID 19 or from the business lockdowns.
I have always said if ever in question, simply follow the money. Today, we saw the weakness in the financial sector and with some of the top us banks. Next week, we will look globally and examine the relative strength of the Chinese and European banks to see if we could be going into a global rally or recession.
To get a head start on next week's column, take the time to research the top Chinese and European banks for clues to see if we could be heading into a global recession. If you have market questions, email them to my address below.
Plan your work, work your plan, and share your harvest!
DAVID O. ENGLAND is an investor/trader, financial analyst/educator/lecturer and Associate Professor Emeritus of Finance. This column is for educational purposes only and not intended as financial advice. Past performance does not dictate future returns. Questions? Send to email@example.com. Full Disclosure: The author does not own any securities in this column.
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