The Bottom Line:
- NASDAQ and S&P 500 experienced downside reversals after hitting new highs
- Downside reversals suggest market has run out of steam short-term
- Sideways to down action expected in the coming week to allow for consolidation
- Equal-weight S&P 500 ETF (RSP) outperformed market-cap weighted S&P 500 (SPY), indicating broader market strength
- Real Estate sector (XLRE) was top performer, suggesting potential rotation into defensive plays
Nasdaq and S&P 500 Experience Downside Reversals After Reaching New Highs
Nasdaq and S&P 500 Fail to Hold New Highs
The Nasdaq experienced a downside reversal today, closing down 0.7% after hitting the 18,000 level. Similarly, the S&P 500 also saw a downside reversal and an outside day, closing down 0.4% after surpassing the 5,500 mark. These reversals suggest that the markets have run out of steam in the short term and may need to cool off or consolidate before attempting to move higher again.
Expectations for the Coming Week
Based on today’s action, the expectation going into next week is for the markets to move lower or sideways. This would allow the 21-day moving average to catch up and give stocks an opportunity to digest recent gains. While a gap up and run on Monday cannot be ruled out, the normal course of action would be for the markets to pause or rotate after bumping against round numbers and experiencing downside reversals, especially on a Friday close near the lows.
Equal-Weight S&P 500 Outperforms Market-Cap Weighted Counterpart
Interestingly, while the major indexes closed down on the day, the equal-weight S&P 500 ETF (RSP) finished slightly higher, with a closing range of 46%. In contrast, the market-cap weighted S&P 500 ETF (SPY) had a closing range of just 18% and finished near the bottom of its range. This divergence suggests that mega-cap stocks were out of favor today, while the average stock managed to hold up better. This broadening out of market participation is a constructive sign, even though the overall market experienced a downside reversal.
Short-Term Market Outlook: Sideways to Down Action Expected for Consolidation
Short-Term Consolidation Likely After Failed Breakouts
The failed breakouts seen in the Nasdaq-100 Equal Weighted Index (QQEW) and other indexes suggest that the market may not be ready to sustain a move higher just yet. While these failed breakouts are not uncommon during bull markets, they indicate that the market may need to consolidate or pull back slightly before attempting to break out again. A healthy consolidation could involve the index coming back to its 50-day moving average, forming a flat base, and then making another attempt at breaking out.
Downside Reversal Buyback Rule: A Potential Buy Signal
The downside reversal experienced by the market today is an important event to monitor, as it could lead to a potential buy signal in the coming days. According to IBD’s Market School rules, if the market is able to close back above the high of the downside reversal day within two to three days, it could signal a “downside reversal buyback.” This buyback would be considered a buy signal, similar to a follow-through day, a move above the 21-day moving average, or a move above a prior marked high. If this occurs on Monday or Tuesday, it would be a meaningful development and could suggest that investors should consider putting their “gas back on.”
Sector Rotation: Real Estate Outperforms on Down Day
On a day when most sectors closed lower, the Real Estate Select Sector SPDR Fund (XLRE) managed to close up 0.8%, making it the top-performing sector ETF. Although the relative strength line for XLRE has been lagging and remains below its moving averages, the fact that it outperformed on a down day is noteworthy. This suggests that investors may be rotating into more defensive plays within the real estate sector. One example of a stock within this space that saw positive movement today is Digital Realty Trust (DLR). While real estate stocks may not be the most dynamic, it is essential to monitor sector rotation, as the hottest sectors on a down day can provide insight into where money is flowing and potential opportunities for investment.
Equal-Weight S&P 500 ETF Outperforms Market-Cap Weighted S&P 500, Signaling Broader Market Strength
Equal-Weight S&P 500 Outperforms Market-Cap Weighted S&P 500, Signaling Broader Market Strength
While the major indexes closed lower on Friday, the equal-weight S&P 500 ETF (RSP) managed to finish slightly higher, with a closing range of 46%. In contrast, the market-cap weighted S&P 500 ETF (SPY) had a closing range of just 18% and finished near the bottom of its range. This divergence suggests that the average stock held up better than the mega-cap stocks, which were out of favor on Friday.
Rotation into Defensive Sectors Like Real Estate
The Real Estate Select Sector SPDR Fund (XLRE) was the top-performing sector ETF on Friday, closing up 0.8% despite the broader market decline. Although the relative strength line for XLRE has been lagging and remains below its moving averages, the sector’s outperformance on a down day indicates that investors may be rotating into more defensive plays within the real estate space. Digital Realty Trust (DLR) is one example of a stock within this sector that saw positive movement on Friday.
Broadening Market Participation: A Constructive Sign
The outperformance of the equal-weight S&P 500 ETF compared to its market-cap weighted counterpart is a constructive sign for the overall market. This broadening out of market participation suggests that the rally is not just being driven by a handful of large-cap stocks, but rather a wider range of companies across various sectors and market capitalizations. This healthy breadth is essential for the sustainability of the bull market, even though the major indexes experienced downside reversals on Friday.
Real Estate Sector Emerges as Top Performer, Hinting at Potential Defensive Play Rotation
Real Estate Sector Stands Out Amid Market Weakness
In a day marked by downside reversals in major indexes like the Nasdaq and S&P 500, the real estate sector emerged as a bright spot. The Real Estate Select Sector SPDR Fund (XLRE) was the top-performing sector ETF, closing up 0.8% despite the broader market decline. While the relative strength line for XLRE has been lagging and remains below its moving averages, the sector’s outperformance on a down day suggests that investors may be seeking defensive plays within the real estate space.
Investors Rotate into Defensive Plays Like Digital Realty Trust
One notable example of a real estate stock that saw positive movement on Friday is Digital Realty Trust (DLR). As investors look for potential safe havens amid market uncertainty, companies like DLR may attract attention. While real estate stocks may not be the most dynamic investments, monitoring sector rotation can provide valuable insights into where money is flowing during market downturns.
Real Estate’s Resilience Hints at Potential Defensive Play Rotation
The real estate sector’s ability to buck the trend on a day when most other sectors closed lower is a noteworthy development. This resilience suggests that investors may be starting to rotate into defensive plays, seeking to protect their portfolios from potential market volatility. As the market navigates through a period of uncertainty and consolidation, keeping an eye on sectors like real estate could help identify opportunities for investment in the coming weeks.
Uber, JPMorgan, and Hilton in Focus Amid Market Fluctuations
Uber’s Stock Rises Despite Market Downturn
Amid the market fluctuations and downside reversals experienced by major indexes like the Nasdaq and S&P 500, Uber’s stock managed to close higher on Friday. The ride-hailing giant’s shares demonstrated resilience in the face of broader market weakness, suggesting that investors may be recognizing the company’s potential for growth and profitability in the long term. As Uber continues to expand its services and improve its financial performance, it could attract further attention from investors seeking opportunities in the technology sector.
JPMorgan’s Mixed Performance Reflects Banking Sector Uncertainty
JPMorgan Chase, one of the largest banks in the United States, experienced a mixed trading session on Friday. While the bank’s stock initially showed strength, it later succumbed to the overall market pressure and closed lower. This performance reflects the uncertainty surrounding the banking sector, as investors weigh the potential impact of economic factors such as interest rates, loan growth, and credit quality. As the market navigates through this period of consolidation, JPMorgan’s ability to maintain its financial stability and generate consistent returns will be closely watched by investors.
Hilton Weathers Market Turbulence, Showcasing Hospitality Sector Resilience
Hilton Worldwide Holdings, a leading global hospitality company, demonstrated resilience during Friday’s market turbulence. Despite the downside reversals in major indexes, Hilton’s stock managed to hold its ground, reflecting the company’s strong fundamentals and the overall resilience of the hospitality sector. As travel demand continues to recover in the wake of the COVID-19 pandemic, Hilton’s global presence, strong brand recognition, and focus on customer experience could position the company for long-term growth. Investors may view Hilton as a potential opportunity within the consumer discretionary sector, especially as the global economy recovers and travel activity resumes.
