Breaking News
Investing Pro 0
NEW! Get Actionable Insights with InvestingPro+ Try 7 Days Free

Mid-June Reversal Continues Even In Tech And Small Caps

By Anna CoullingStock MarketsAug 15, 2022 11:35AM ET
www.investing.com/analysis/midjune-reversal-continues-even-in-tech-and-small-caps-200628527
Mid-June Reversal Continues Even In Tech And Small Caps
By Anna Coulling   |  Aug 15, 2022 11:35AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
US500
-2.20%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
US2000
-3.65%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
IWM
-2.97%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
IXIC
-2.99%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
XLK
-2.93%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
QCNc1
+2.08%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

Last week’s better-than-expected CPI and PPI releases have been sufficient to lift the indices, moving some out of their consolidation pattern. Both data sets consider inflation, with the CPI measuring the pace at which inflation is rising. CPI in July came in at 8.5% against 9.1% for June. It is this slowing that has convinced the market that inflation may have peaked. 

The Fed may not be required to raise rates quite so aggressively to avoid a recession. We shall see!

Looking at the charts for the major indices, the tech sector and growth stocks, in the shape of the Russell 2000 and associated ETFs, continue to build on the mid-June reversal. However, note my comments on the volume on the screenshot for the iShares Russell 2000 ETF (NYSE:IWM).

NQ Daily Chart
NQ Daily Chart

We begin with NQ, the E-mini futures for the NASDAQ. We can see the index has consolidated and traded between the S3 & R3 pivots. Last Wednesday’s up candle was on CPI day, but it failed to break and hold above the resistance at the R3. Thursday’s PPI release pushed the NQ through this resistance, but the candle closed with a deep upper wick back below the R3. This often happens on a breakout with the price action returning to test the breakout level.

NQ Weekly Chart
NQ Weekly Chart

But if we consider the weekly chart, we can see why the breakout has stalled as the NQ is at the volume point of control at the 13270 area in this time frame. It is where we would expect the price action to pause. Plus, if we look over to the left of the chart, the significance of this level becomes evident as it provided the platform for the move to the all-time high in November 2021.

XLK Daily Chart
XLK Daily Chart

If we consider the chart of the Technology Select Sector SPDR® Fund (NYSE:XLK), we can see similarities in structure to the NQ on the daily chart.

XLK Weekly Chart
XLK Weekly Chart

However, on the weekly chart, the XLK has yet to achieve the volume point of control, which sits at the $155 region.

ES Futures Daily Chart
ES Futures Daily Chart

Moving to the S&P 500 E-mini futures, we have a similar candle configuration to the NQ on the daily chart.

But the price action on the weekly is more positive as the ES has already broken away from the volume point of control at 4150, with the candle only pulling back briefly from the R3 weekly pivot at 4250

ES Futures Weekly Chart
ES Futures Weekly Chart

From the above charts, the market’s optimism and positive price action fly in the face of the Fed’s determination to remain hawkish on inflation and stick to its aggressive agenda of rate hikes. However, the market appears to disagree. While volumes and liquidity do fall in August and can result in price spikes, we are seeing the June reversal in equities continue to play out. But whether this reversal is simply a bear market rally, a very sharp short squeeze (as I’ve read) or the start of a genuine bull rally to attack last year’s ATHs remains to be seen. All we can do is watch the price action and volume and trade accordingly.

IWM Daily Chart
IWM Daily Chart
My final two charts are a for the iShares Russell 2000 ETF, where inflows suggest investors feel confident enough to move into what are considered more speculative riskier stocks.
IWM Weekly Chart
IWM Weekly Chart

Stocks in the Russell 2000 have an average market cap of $1.15 billion. Many are newer, growth companies and, despite being more volatile, have the potential to deliver double-digit returns as it has been shown that small caps can outperform the large caps over long periods. The index is also more diversified because of its focus on smaller companies. It is less top-heavy and is not reliant on the performance of a few large companies.

What is also interesting is that since the June low, the Russell 2000 is up 16% while the S&P 500 has gained 13%, which we can see from the chart structure for both indices. Moreover, from a historical perspective, small-cap stocks outperform large-cap stocks in the initial stages of a new cyclical uptrend. And here, note the word ‘cyclical’ as the market is assuming this period of inflation is indeed cyclical and not structural. There is a crucial difference resulting in very different outcomes.

Mid-June Reversal Continues Even In Tech And Small Caps
 

Related Articles

Michael Kramer
Stocks Rally As Rates Plunge By Michael Kramer - Sep 29, 2022 8

Stocks jumped yesterday after the Bank of England noted it would help to stabilize the British bond market. Rates fell dramatically across the curve in the UK, resulting in rates...

Jani Ziedins
Stocks Bounce After All Hope Is Gone By Jani Ziedins - Sep 29, 2022 4

The S&P 500 popped 2% Wednesday, snapping a six-day losing streak. Even in this overwhelmingly bearish environment, seven down days was a little too much and a bounce was...

Mid-June Reversal Continues Even In Tech And Small Caps

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
Solomon Lalani
Solomon Aug 15, 2022 1:28PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Thanks for your contribution. Quite helpful
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email