The market downturn from a week prior activated some tactical buying opportunities, which subsequently led to a rebound in stocks, recovering much of the losses incurred during the week.
However, BTG strategists are cautious, suggesting that the “majority of the rebound has probably played out.” They recommend that investors consider reducing exposure as the S&P 500 (SPX) approaches the 5400-5440 range.
In a note released on Sunday, the strategists expressed their belief that “a lasting bottom is likely still ahead.”
They noted that it’s rare to see a 5%+ SPX decline conclude without a significant breadth washout, characterized by less than 20% of components trading above their 20-day moving average. Last week, only 31% of components reached this point, indicating that unless this time is different, another downturn might be necessary to fully reset breadth.
BTIG also highlights that market sentiment is mixed. While put/call ratios have returned to levels not seen since April, which is a positive indicator, the NAAIM exposure index—tracking the average stock market exposure of active investment managers—remains elevated, surpassing typical levels observed during market corrections.
On a sectoral basis, consumer stocks continue to exhibit widespread weakness, whereas defensive sectors are consolidating near their highs.
BTIG remains optimistic about real estate investment trusts (REITs), citing their resilience at the breakout level. However, they consider homebuilders to be at risk as long as they remain below key resistance levels.
Regarding small-cap stocks, BTIG observes that the iShares Russell 2000 ETF (IWM) is still below the critical resistance level of $210, advising caution until this level is regained.
Meanwhile, gold seems well-positioned for another upward move, with the GLD (NYSE) ETF consolidating while testing the $225 level for the fifth time in recent months. The strategists believe “a breakout is imminent.”
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