Despite last week's pullback in the S&P 500 (SPX), the underlying indicators did not align with durable lows, as 60% of the benchmark index’s components remained above their 20-day moving average (DMA).
According to BTIG analysts, that inconsistency is partly due to the rotational nature of the market, with tech weakness being offset by cyclical strength.
"Regardless, we still expect a reading closer to 15% before this correction has run its course," they noted.
"We can probably drift a bit higher on SPX towards its gap at 5550, before moving lower to fill a gap at 5375."
Internally, market rotations have been intense, BTIG added.
The 12-day rate-of-change for the Russell 2000 versus the NASDAQ 100 is over 20%, ranking as the fifth largest such move since 1985, surpassed only by a few days in December 2000 and January 2, 2001.
Analysts believe a “reversal of that reversion” is likely, with semiconductors (SMH) oversold into support, while homebuilders (ITB) are overbought and rallying on anticipated rate cuts, despite higher rates being part of their bull thesis over the past couple of years.
“Correlation between ITB and SMH has gone from +.9 for much of the last two years to -.4. SMH vs. ITB is oversold into support,” analysts pointed out. While this may not be the end of correction for semis, they “should attempt” to bounce back from here.
Moreover, BTIG noted there are breakouts among defensive stocks, with sectors such as staples, utilities, REITs, and healthcare all looking strong.
US equities rose higher on Friday, ending a turbulent week on a high note as investors considered new U.S. inflation data.
The S&P 500 rose 1.11%, closing at 5,459.10, and the Nasdaq Composite increased by 1.03%, finishing at 17,357.88.