Cross-Asset Strategist & Quantitative Analyst, Pennock Idea Hub

Cam Hui

Cross-Asset Strategist & Quantitative Analyst

Pennock Idea Hub

We are creators of independent equity research. The Pennock Idea Hub team are veterans of the investment industry. Much of our team has spent their careers at Merrill Lynch, Deutsche Bank, RBC Capital Markets and Wood Gundy. We have taken every aspect of research back to the studs and returned to first principles. The Pennock Idea Hub marries the interests of the sell and buy side. 

We offer the best research for institutional investors by:

-Only publishing research from veteran analysts
-Eliminate the inherent conflicts of the traditional sell and buy side relationship
-Ensure our team is always accessible; collaboration with clients nurtures our collective success

Cross-Asset & Quantitative Research

Technical Analysis

A week ago, we highlighted the risk of stock market weakness because the correlation between the S&amp;P 500 and VVIX, or the volatility of the VIX, had spiked. The pullback duly arrived and the S&amp;P 500 briefly tested its 50 dma.Short-term market conditions have become sufficiently oversold that, barring an unexpected negative shock, the stock market should rebound. Based on our analysis of market internals, cyclical and reflation sectors are poised to be the next leadership and growth stocks have become increasingly vulnerable.If we are right in our tactical assessment, the minor panic last week was just a brief summer squall.

A week ago, we highlighted the risk of stock market weakness because the correlation between the S&amp;P 500 and VVIX, or the volatility of the VIX, had spiked. The pullback duly arrived and the S&amp;P 500 briefly tested its 50 dma.Short-term market conditions have become sufficiently oversold that, barring an unexpected negative shock, the stock market should rebound. Based on our analysis of market internals, cyclical and reflation sectors are poised to be the next leadership and growth stocks have become increasingly vulnerable.If we are right in our tactical assessment, the minor panic last week was just a brief summer squall.

Cross Asset Strategy

Our review of market internals shows that the value and reflation trade is gaining ground. If this trend continues, it would translate into a bullish intermediate-term outlook for equities. However, investors have to be aware of the supply chain disruption risks from the Delta variant, the chances of a political impasse in Washington, and the negative effects of a possible corporate tax increase.

Our review of market internals shows that the value and reflation trade is gaining ground. If this trend continues, it would translate into a bullish intermediate-term outlook for equities. However, investors have to be aware of the supply chain disruption risks from the Delta variant, the chances of a political impasse in Washington, and the negative effects of a possible corporate tax increase.

Constructive Value and Reflation Green Shoots

Regular readers will know that we have been calling for a sideways holding pattern for the S&amp;P 500. That remains our base-case scenario for the rest of August. Continuing concerns about the Delta variant stalling growth are likely to put downward pressure on risk appetite. On the other hand, an improving EPS growth outlook is putting a floor on stock prices.The most likely scenario is a continued sideways pattern for another month until it becomes evident that the worst of the Delta variant has run its course, which would be followed by a cyclical and value stock rally. The bearish scenario is a legislative impasse in Washington, either over the debt ceiling or the infrastructure bill. In that case, watch for renewed concerns over economic growth, dovish Fed, falling bond yields and rising risk aversion.

Regular readers will know that we have been calling for a sideways holding pattern for the S&amp;P 500. That remains our base-case scenario for the rest of August. Continuing concerns about the Delta variant stalling growth are likely to put downward pressure on risk appetite. On the other hand, an improving EPS growth outlook is putting a floor on stock prices.The most likely scenario is a continued sideways pattern for another month until it becomes evident that the worst of the Delta variant has run its course, which would be followed by a cyclical and value stock rally. The bearish scenario is a legislative impasse in Washington, either over the debt ceiling or the infrastructure bill. In that case, watch for renewed concerns over economic growth, dovish Fed, falling bond yields and rising risk aversion.

As the S&amp;P 500 advanced to fresh highs despite widespread evidence of negative RSI and breadth divergences, the market faces a number of unanswered questions that may be indicative of possible impending leadership rotation.On one hand, the market is exhibiting a series of bearish divergence from breadth indicators and risk appetite indicators. On the other hand, a number of reflationary green shoots are appearing, indicating that the cyclical trade is about to get a second wind. How the market resolves those questions will be clues to the next major leg for stock prices.

As the S&amp;P 500 advanced to fresh highs despite widespread evidence of negative RSI and breadth divergences, the market faces a number of unanswered questions that may be indicative of possible impending leadership rotation.On one hand, the market is exhibiting a series of bearish divergence from breadth indicators and risk appetite indicators. On the other hand, a number of reflationary green shoots are appearing, indicating that the cyclical trade is about to get a second wind. How the market resolves those questions will be clues to the next major leg for stock prices.

It’s time for another periodic review of sector leadership. Our latest RRG chart shows growth sectors (technology, communication services) and selected defensive sectors (consumer staples, healthcare, REITs) in the top half of the chart, indicating leadership positions. Value and cyclical sectors are the laggards in the bottom half.We interpret these conditions as neither bullish nor bearish, but a story of balanced leadership. The high beta components of the S&amp;P 500, growth and value, have been undergoing an internal rotation. As the economy shifted from an early-cycle recovery to a mid-cycle expansion (see <a href="https://www.smartkarma.com/insights/how-to-navigate-the-mid-cycle-expansion" target="_blank" rel="noopener">How to Navigate the Mid-Cycle Expansion</a>), market jitters over stalling global growth have risen. As a consequence, investors have rotated from the cyclical and reflation trade back into growth as growth stocks become more valuable when economic growth is scarce. At the same time, the stock market has also been supported by defensive sectors such as healthcare and real estate. Currently, value is showing some signs of early strength, but a turn in the value/growth relationship hasn’t been confirmed.Our base-case scenario calls for a choppy range-bound market until the cyclical and reflation trade theme retakes market leadership. If the stock market were to definitively turn upward, leadership may have to come from high-beta small-cap stocks.

It’s time for another periodic review of sector leadership. Our latest RRG chart shows growth sectors (technology, communication services) and selected defensive sectors (consumer staples, healthcare, REITs) in the top half of the chart, indicating leadership positions. Value and cyclical sectors are the laggards in the bottom half.We interpret these conditions as neither bullish nor bearish, but a story of balanced leadership. The high beta components of the S&amp;P 500, growth and value, have been undergoing an internal rotation. As the economy shifted from an early-cycle recovery to a mid-cycle expansion (see How to Navigate the Mid-Cycle Expansion), market jitters over stalling global growth have risen. As a consequence, investors have rotated from the cyclical and reflation trade back into growth as growth stocks become more valuable when economic growth is scarce. At the same time, the stock market has also been supported by defensive sectors such as healthcare and real estate. Currently, value is showing some signs of early strength, but a turn in the value/growth relationship hasn’t been confirmed.Our base-case scenario calls for a choppy range-bound market until the cyclical and reflation trade theme retakes market leadership. If the stock market were to definitively turn upward, leadership may have to come from high-beta small-cap stocks.

Sector Review: Balanced Leadership and Rotation

United States

SPDR S&P 500 ETF Trust is an exchange-traded fund incorporated in the USA. The ETF tracks the S&P 500 Index. The Trust consists of a portfolio representing all 500 stocks in the S&P 500 Index. It holds predominantly large-cap U.S. stocks. This ETF is structured as a Unit Investment Trust and pays dividends on a quarterly basis. The holdings are weighted by market capitalization.

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SPDR S&P 500 (SPY US)

The S&P 500 Endures A Summer Squall

Short-term market conditions have become sufficiently oversold that, barring an unexpected negative shock, the stock market should rebound.

Cam Hui

Constructive Value and Reflation Green Shoots

Our review of market internals shows that the value and reflation trade is gaining ground. If this trend continues, it would translate into a...

Cam Hui

A Range-Bound August?

We have been calling for a sideways holding pattern for the S&P 500. That remains our base-case scenario for the rest of August.

Cam Hui

A Whiff of Rotation in the Air

As the S&P 500 advanced to fresh highs despite evidence of negative divergences, the market faces a number of unanswered questions that may be...

Cam Hui

Sector Review: Balanced Leadership and Rotation

Our base-case scenario calls for a choppy range-bound market until the cyclical and reflation trade theme retakes market leadership.

Cam Hui

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52-week Range

Market Cap (USDm)

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