In the month of June 2021, the S&P 500 showed continued strength by gaining 81 points (1.9%) from 4216.52 to 4297.5.
June 2021 was also a volatile month, which saw a temporary drawdown (peak to trough) move from 4255 to 4164.4 (-2.1%) due to inflation fears and the Fed’s shift towards raising interest rates earlier than expected.
However, that bout of selldown was quickly reversed when the Fed Chairman Jerome Powell signalled to the market that they will remain highly accommodative and the Fed will be very mindful in their public communication over their expectations on tapering and interest rate rise.
In terms of key levels, the S&P 500 managed to recapture the previous all time high at 4238 established in early May, and showed sustained strength by being able to hold above that level towards the end of June in a bullish manner.
Going forward, if there are no major catalysts that will change the ongoing market narrative, we can expect the S&P 500 to trade within the turquoise trend channel below. S&P 500 will likely be constrained at the 4340 resistance level in the short term, with 4200 acting as key support.
In terms of managing downside risks, if the critical 4162 support level fails to hold, this likely means that the stock market will be faced with unexpected market concern(s) that have the potential to trigger further downside below 4162.
TAKEAWAY
- The market posture ending June 2021 looks very constructive.
- Not only did the S&P 500 recapture the previous all time high, it also managed to successfully trade above it heading into July.
- The segments driving the S&P 500 upward are information technology and health care sectors.
- S&P 500 pure Growth Stocks across all sectors were also bullish in unison, while the S&P 500 pure Value play appeared lacklustre.
- This suggests traders and investors are piled on more risky asset classes in the areas of Growth stocks, while the defensive Utilities sector printed a negative monthly return.
- In terms of the short term market outlook, bullish sectors (Information Technology, Health Care etc) and bullish plays (Growth) are all trading at or near key resistance levels.
- Other less bullish sectors appear to be indecisive (Equal Weighted S&P 500, Materials etc) or have started to show signs (Pure Value, Financials, Industrial, Consumer Staples, Utilities) of heading into a short term downtrend.
- However, unless the market price action indicates otherwise, the medium to long term market trend continues to look constructive and bullish.
S&P 500 Sectoral Performance
There are 11 sectors making up the S&P 500. It appears for the month of June 2021, the 1.9% S&P 500 gain has been mostly contributed by the Information and Technology, Health Care and Communication Services sectors due to their heavy weightage. Collectively, these 3 sectors make up more than half of the S&P 500.
The Information Technology sector gained 6.01% with a 27.6% S&P 500 weight.
The Health Care sector gained 2.76% with a 13.5% S&P 500 weight.
The Communication Services sector gained 2.58% with a 10.8% weight.
While the Energy and Real Estate fared extremely well, contributing 6.52% and 4.38% respectively, they carry very little weight in the S&P 500.
From a sectoral analysis perspective, it doesn’t seem like the stock market is sounding out any alarms for the following reasons:
1
Sectoral market breadth appears to be broad, with 8 out of 11 sectors having positive gains.
2
Out of the 3 sectors (Industrials, Materials and Utilities) that had negative monthly gains, they collectively contributed a total 13.8% weight to the S&P 500 only.
3
The defensive bellwether S&P 500 Utilities printed a -5.1% monthly loss, suggesting risk on appetite is high for traders and investors. The Utilities sector generally outperforms other sectors in concerning market conditions.
S&P 500 Equal Weight, Growth and Value Performance
The chart below compares the relative performance of S&P 500, S&P 500 Equal Weight, S&P 500 Pure Growth, and S&P 500 Value since May 2021.
It is evident there has been a change in leadership from Value which did very well in May, but starting from June Growth significantly outperformed. Continued strength in Pure Growth highlights a risk on appetite for the stock market, as growth stocks are in general of higher risk compared to Value stocks.
We also started to see a subtle shift in market breadth, in the form of the Equal Weighted S&P 500. Since mid June, the S&P 500 main index overtook the Equal Weighted S&P 500.
This suggests the strength as shown in the S&P 500 main index is mostly contributed through a handful of higher weighted component stocks such as growth stocks in the Information Technology, Health Care and Communication Services sectors.
S&P 500 1 Month Outlook
S&P 500 Pure Growth
The S&P 500 Pure Growth is showing a clear and strong bullish upward trend. It has been making a series of higher highs and lower lows. It also broke above the previously stubborn all time high resistance at 17905 in a convincing and sustained manner.
However, it remains to be seen whether Pure Growth will continue to lead the charge for the S&P 500 in the month of July 2021, as it is trading at the upper resistance trendline of the channel.
The 17905 level is a strong support, as it was the previous all time high established in Feb and April 2021.
If the Information Technology sector is able to continue to trade above 17905, it will be mid term bullish for the S&P 500. However, it appears there is also scope for some sort of short term consolidation in July 2021 to occur given this sector is currently trading near a key resistance channel line.
S&P 500 Pure Value
The S&P 500 Pure Value on the other hand is showing some weakness. Since the beginning of June it started to sell off after a period of sustained strength since the 2020 Covid lows. This sell off resulted in the Pure Value S&P 500 trading below the upward trend channel. Towards the latter part of June 2021, attempts to break back into the trend channel failed.
Additionally, it also appears to be starting to trade in a downward moving channel band (in red).
In terms of the short term outlook for S&P Value, if price continues to hold above 7686 the outlook remains favourable. However, a break below that level will likely result in the continuation of the downward trend.
S&P 500 Equal Weighted
The S&P 500 Equal Weighted is currently forming an upward biased triangle wedge formation. If it is successful at breaking above 6183, and can demonstrate the ability to sustain above that level, there is very little resistance for this sector to trade higher.
If this were to occur we will start to see a broad based rally and the lower weighted S&P 500 sectors leading the charge.
However, short term wise, it seems more likely to consolidate trade within the wedge formation which will be neutral for the S&P 500 in the short run.
Information Technology Sector
With reference to the chart below, the S&P 500 Information Technology sector is showing a strong bullish upward trend. It has been making a series of higher highs and lower lows.
However, it remains to be seen whether the Information Technology sector will continue to lead the charge for the S&P 500 in the month of July 2021, as it is nearing the upper resistance trendline of the channel.
The 2521 level is a strong support, as it was the previous all time high established in April 2021.
If the Information Technology sector is able to continue to trade above 2521, it will be mid term bullish for the S&P 500 overall given its highest weightage. However, it appears there is also scope for some sort of short term consolidation in July 2021 to occur given this sector is currently trading near a key resistance band.
Health Care Sector
A similar trend applies to the Health Care Sector, which is showing a strong bullish upward trend. It has been making a series of higher highs and lower lows.
However, it remains to be seen whether the Health Care sector will continue to lead the charge for the S&P 500 in the month of July 2021, as it is trading at the upper resistance trendline of the channel.
The 1458 level is a strong support, as it was the previous all time high established in May 2020. If the Health Care sector is able to continue to trade above 1458, it will be mid term bullish for the S&P 500 overall given its second highest weightage. However, it appears there is also scope for some sort of short term consolidation in July 2021 to occur given this sector is currently trading near a key resistance band.
Consumer Discretionary Sector
Consumer Discretionary is the third highest weighted S&P 500 sector.
It is currently trading near the all time high resistance level of 1443. If Consumer Discretionary breaks and holds above 1443 in a sustainable manner in July, we will likely see a leadership change from Information Tech and Health Care to Consumer Discretionary.
However, if it fails to clear the 1443 level, we can expect this sector to weigh on the S&P 500 short term in the month of July.
Communication Services Sector
This sector is currently forming an upward biased triangle wedge formation. If it is successful at breaking above 40, and can demonstrate the ability to sustain above that level, there is very little resistance for this sector to trade higher.
Given this being the 4th largest sector by weight, we may very well see a leadership change if this breakout upwards price action were to occur.
However, short term wise, it seems more likely to consolidate trade within the wedge formation which will be neutral for the S&P 500 in the short run.
Financials Sector
S&P 500 Financials is looking less bullish compared to its higher weighted peers above. There are 2 reasons for this less bullish outlook:
- It failed to trade in the upper bullish channel band (see black channel)
- There is a short term bearish trendline resistance (see red line)
However, it is still trading within the longer term bullish trend channel (see green trend line) and as long as it can hold above this line, there is still room to be cautiously optimistic.
Industrials, Consumer Staples, Utilities and Materials Sectors
These 4 sectors collectively contribute 20.3% by weight to the S&P 500.
Short term trend wise they have a slightly bearish undertone. If these sectors continue to weaken they may collectively weigh down on the S&P 500 in the month of July 2021.
Conclusion
The market posture ending June 2021 looks very constructive. Not only did the S&P 500 recapture the previous all time high, it also managed to successfully trade above it heading into July.
The segments driving the S&P 500 upward are information technology and health care sectors. S&P 500 pure Growth Stocks across all sectors were also bullish in unison, while the S&P 500 pure Value play appeared lacklustre.
This suggests traders and investors are piled on more risky asset classes in the areas of Growth stocks, while the defensive Utilities sector printed a negative monthly return.
In terms of the short term market outlook, bullish sectors (Information Technology, Health Care etc) and bullish plays (Growth) are all trading at or near key resistance levels. Other less bullish sectors appear to be indecisive (Equal Weighted S&P 500, Materials etc) or have started to show signs (Pure Value, Financials, Industrial, Consumer Staples, Utilities) of heading into a short term downtrend.
However, unless the market price action indicates otherwise, the medium to long term market trend continues to look constructive and bullish.
Disclaimer: Please note that all the information contained in this newsletter is intended for illustration and educational purposes only. It does not constitute any financial advice/recommendation to buy/sell any investment products or services.
