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
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Cross-Asset & Quantitative Research

Cross Asset Strategy

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

Technical Analysis

Energy Select Sector SPDR Fund / Technical Analysis

Historically, The Economist magazine covers have been excellent contrarian market signals (see <a href="https://www.smartkarma.com/insights/poised-for-a-bond-market-rally" target="_blank" rel="noopener">Poised for A Bond Market Rally</a>). The Economist may have done it again this week with a focus on the global warming effects of heat waves in North American and floods in Germany.We believe coal and energy equities represent potential contrarian buying opportunities for investors. In addition, the stock market appears to have undergone a bullish reversal off a panic bottom, which should resolve in higher prices in the days and weeks ahead.

Historically, The Economist magazine covers have been excellent contrarian market signals (see Poised for A Bond Market Rally). The Economist may have done it again this week with a focus on the global warming effects of heat waves in North American and floods in Germany.We believe coal and energy equities represent potential contrarian buying opportunities for investors. In addition, the stock market appears to have undergone a bullish reversal off a panic bottom, which should resolve in higher prices in the days and weeks ahead.

As a chartist, it’s easy to be bearish. After all, the market is experiencing numerous negative breadth divergences and signs of excessive bullish sentiment. Beneath the surface, however, the technical condition of the market can better be described a “glass half full or half empty” dilemma.We continue to believe the market has bifurcated into two distinct markets — value and growth. In aggregate, it’s difficult to make much of a judgment about the direction of the S&amp;P 500 owing to the divided nature of market internals. The internal rotation is continuing and value is poised to gain the upper hand.Short-term breadth and sentiment readings indicate that a rebound is likely, but the bulls shouldn't bring out the champagne just yet as the market could just be at the bottom of a trading range. Until we see a definitive bullish or bearish catalyst, our base case calls for a sideways market with a possible minor upward bias.

As a chartist, it’s easy to be bearish. After all, the market is experiencing numerous negative breadth divergences and signs of excessive bullish sentiment. Beneath the surface, however, the technical condition of the market can better be described a “glass half full or half empty” dilemma.We continue to believe the market has bifurcated into two distinct markets — value and growth. In aggregate, it’s difficult to make much of a judgment about the direction of the S&amp;P 500 owing to the divided nature of market internals. The internal rotation is continuing and value is poised to gain the upper hand.Short-term breadth and sentiment readings indicate that a rebound is likely, but the bulls shouldn't bring out the champagne just yet as the market could just be at the bottom of a trading range. Until we see a definitive bullish or bearish catalyst, our base case calls for a sideways market with a possible minor upward bias.

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)

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

Another Magazine Cover Buy Signal?

We believe coal and energy equities represent potential contrarian buying opportunities . As well, the stock market appears to have undergone a...

Cam Hui

A Glass Half Full, or Half Empty?

Short-term breadth and sentiment readings indicate that a rebound is likely, but until we see a definitive catalyst, our base case calls for a...

Cam Hui

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Market Cap (USDm)

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