Wavetops During a Heatwave

Dog days of summer are here meteorologically, but far from it in the stock markets. The old adage of “sell in May, and go away” used to ring true, meaning that not much happened in the summer months. Attribute that to what you may, it hasn’t rung true for quite some time now.

Last week I wrote about the momentum we are seeing in the stock market, and how all-time highs (ATHs) ironically are a great time to invest. ATHs' tend to beget more ATHs, and waiting for a pullback doesn’t necessary align with that creeping bias in your head (and can’t keep going higher, can it? … yes it can, and it does).

Here’s some gleanings of data from the last week that I though prudent to ruminate on for you, the investor:

Cap-weighted stocks are in command versus equal-weighted stocks. This has been the case for a while, and since the start of 2020, cap-weight index SPY is +95% while equal-weight index is +60%. This speaks to what we call a lack of breadth in the market, meaning not all stocks are participating in upward action the same. Bigger companies (large cap stocks, big companies) have faired far better. This relationship ebs and flows (between the two indexes), but it currently sits at a greater-than 5% spread favoring cap-weight.

Forward returns from 5%+ outperformance tend to continue to outperform. How does an investor play this? Watch the spread between the two proxies, but continue to ride the large-cap companies that currently have all the momentum.

On a similar note, large cap stocks are demonstrating participation compared to small cap stocks. We look at what percentage of stocks are showing us buy signals (intermediate-term indicator), and large caps are showing 70%+ of them are on a buy signal. Compare that to small caps, where only 37% are showing a buy signal. None of us have a crystal ball, but that data is enough to suggest where the better play is.

Price action alone is not enough to validate allocation changes amongst sizes and styles. The Russell 2000 (small-cap proxy index) (RUT) is on seven consecutive buy signals (amazing!), but that’s just an annotation of price action (positive since April). When stacked up against SPX (a large-cap proxy index), you’ll see that SPX is demonstrably in control of that tug-of-war.

Communications sector strongly in the lead amongst US stock sectors. Two strong proxies for the communications sector, XLC and VOX, both riding high of late, at or near ATHs currently. Current earnings season has begun, so stand by to see where the sector goes from here. Behind comms, you’ll see financials and technology as the next-up sectors rounding out the top 3.

Solar stocks, other energy stocks/funds curiously finding a tailwind from the recent Big Beautiful Bill. Curious, because tax subsidies were paired down quite a bit, but we’ve seen some ETFs and individual stocks do quite well over the last 30 days:

• Invesco Wilderhill Clean Energy ETF (PBW): +17%, 4.6/6 fund score

• Invesco Solar ETF (TAN): +12.4%, 4.9/6 fund score

• First Trust Clean Edge Energy Index Fund (QCLN): +10.8%, 4.1/6 fund score

• Solaredge Tech (SEDG): +24%, 5/5 stock technical attribute score

• Maxeon Solar Tech (MAXN): +54%, 4/5 technical attribute score

• Sunrun (RUN): +33%, 4/5 technical attribute score

Big earnings names report earnings this week, and Fed press conference tomorrow (7/30). This week will bring earnings reports from some of the Magnificent 7: Meta, Microsoft, Amazon and Apple. No telling what we will hear, though these bigger names tend to jolt the market one way or another. Powell will be on the mic tomorrow for the Federal Open Market Committee (FOMC) presser, and every single word will be dissected I’m sure. No telling if we hear of rate cuts, though there are expectations that a September cut of .25% is more likely than not… The last cut to the fed funds rate was in December, and this topic has surely been a polarizing one.

That’s all for now, and thanks for reading! Please share if you know someone that would be interested to hear these things!