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Here are the takeaways from today’s Morning Brief. sign up Every morning you will receive the following message in your inbox:
The Dow Jones Industrial Average (^DJI), Nasdaq 100 (^NDX), and S&P 500 (^GSPC) all hit record highs on Wednesday. The latter, the world’s benchmark stock index, also came tantalizingly close to reaching the psychologically significant 5,000 level for the first time.
Meanwhile, stocks are currently in one of their weakest months of the season, with more bearish months, common in election years, on the horizon. We are also in the midst of a monster three-month rally that, history suggests, could take weeks to digest.
No one is saying investors should take off their “S&P 5,000” hats and short Nvidia (NVDA), but it’s important to note what went well this year and the disconnect that may need to be corrected. Now is a good time to evaluate expansion.
Classic Dow theory assumes that the Dow Jones Industrial Average and the Dow Jones Transportation Average (^DJT) should coincide with each other. Broad and directional agreements are generally required between the companies that manufacture the products and the companies that ship them.
While the industrial sector has recently hit new record highs, the transportation sector has struggled to overcome previous resistance. This could be resolved by a sharp increase in transport volumes, but seasonal fluctuations suggest that industry could “catch up” with transport volumes.
Next is Mega Cap. Whether it’s Mag 7, Mag 6, or Mag 4, the theme of market concentration has been talked about a lot as parochial leadership captures the minds of stock market bulls and bears alike.
This can be seen in the ratios of the two different ways to calculate the S&P 500. This is based on the normal market capitalization method and an equal weighting method where each stock is given equal weight within the index.
The chart above shows that large-cap stocks dominated early in the pandemic in 2020, but retreated to other markets by the presidential election that year. This trend continued for the most part until the 2023 Internet Banking Panic led to megacap outperformance once again.
Chartists and fans of technical analysis may see a huge cup-and-handle pattern that shows a big rally with a decisive break. But without getting too ahead of ourselves, this would be a logical place for the market to find equilibrium, even temporarily.
The bullish view is that the soldiers will once again catch up with the mega-cap generals. The bearish view is that the generals realize they have gone too far and need to get back to the rest of the market.
Either way, there are opportunities to shed more light on undervalued sectors and industries. In this regard, healthcare, financials and industrial stocks all consolidated slightly in December and January before hitting recent highs.
Large-cap healthcare (XLV) is the third-best performing sector this year, up 17% from its late October lows. It only recently reached a new record high, but more importantly, it has broken off weeks of consolidation and started moving higher. The simply measured move points to a preliminary target of $165, about 15% higher than Wednesday’s closing price.
Similarly, large-cap industrial stocks are back to record highs after a six-week rally that just retested previous breakout levels. The sector is up 21% from its October lows and is up 2.5% this year.
Finally, large-cap financials may not have hit new all-time highs, but like industrials, they have simply retested old resistance, which is now support. The Financial Select Sector ETF (XLF) is up 24% from its October lows (behind only tech services and communications services) and is up 4% this year.
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