US Markets Remained Strong in July; Led By Growth, Tech, And Small Cap Sectors

The dog days of summer are in full swing as we turn the calendar to the last of the three traditional summer months. While this time of year tends to be a relatively calm period in the market, the S&P 500 Index (SPX) has gained more than 4% since the end of May.  Additionally, as we have moved through the heart of earnings seasons, a few notable names like Facebook (FB) and Netflix (NFLX) fell short of expectations; FB lost approximately $120 billion in market cap in one day.  On the other hand, Apple (AAPL) continued its strong performance, ultimately becoming the first US-listed company to hit a $1 trillion market cap. 

All of that said, while a few of the tech giants corrected sharply, the sector, as whole, continues to show a strong technical picture. 

The Technology sector continues to boast double digit returns for the year, as the Technology Select Sector SPDR Fund (XLK) is up 15.12% and the Invesco DWA Technology Momentum ETF (PTF) is up 20.66% (thru 8/9/2018).  Technology, as a broad group, remains the number one sector within DALI and is the second highest scoring group in the Asset Class Group Scores out of all 134 groups. Interestingly, the only group that currently scores higher than Technology in the Asset Class Group Scores is Small Cap, specifically Small Cap Growth. 

Like Technology, many of the Small Cap oriented ETFs continue to enjoy double digit returns this year, including the largest ETF in the space, the iShares Russell 2000 ETF (IWM), which is up 10.19% (thru 8/9/2018) and the Invesco DWA Small Cap Momentum ETF (DWAS), which is up 14.24% over the same period.  Unlike Technology and Large Cap Growth, which posted strong gains, many Small Cap funds experienced a bit of consolidation during the month of July, causing these funds to move toward the middle of their weekly distribution readings.  The weekly distribution, also known as a trading band, is a moving average "envelope" around the price of a security.

Ten weeks of price history for the security are used along with a volatility calculation to create the distribution, or trading band. When a stock gets near the top of that ten week trading band, or near the 100% overbought level, it tells us to expect a pullback toward normal levels (i.e., the middle of the trading band which is represented by a 0% reading). When a stock gets near the bottom of the ten week trading band, or near the 100% oversold level, it tells us to expect a rally toward normal levels.

In the case of Small Cap ETFs, we are currently seeing an environment where the distribution readings have normalized (i.e., moved toward the middle of their respective trading bands), after spending much of the year on the overbought side of the ledger.  Below are the charts of two Small Cap ETFs, IWM and DWAS, along with a view of their trading band.  The Small Cap segment of the market remains strong and we continue to view it as an area of leadership.  Given the continued strength in Small Cap, along with the current weekly distribution readings, this could serve as a good entry point for new positions in Small Cap funds.

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While in many ways July was a continuation of many trends already in place this year, there were some areas that bucked their longer term negative trends and experienced near-term rallies.  The most notable areas came from outside the US, specifically Latin America and Brazil.  The iShares MSCI Brazil ETF (EWZ) was up nearly 13% in the month of July; however, is still down more than 12% on the year.  Similarly, the iShares Emerging Market ETF (EEM) kept pace with the S&P 500 (SPX) in July with a return of 3.53%, is still down 6.35% year-to-date, despite this rally.  On the other hand, Crude Oil (CL/), which has been a positive spot in the markets this year with an 11% gain year-to-date (thru 8/9/18), lost 7.5% in the month of July.  Crude continues to trade in a positive trend today, but from here, a move to $58 prices would change the trend back to negative for the first time in over a year.

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Additional Resources

Unless otherwise stated, the performance information included in this article does not include dividends or all potential transaction costs. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

Nothing contained within the article should be construed as an offer to sell or the solicitation of an offer to buy any security. This article does not attempt to examine all the facts and circumstances which may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this article. It is for the general information of and does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation (express or implied), investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.

Dorsey, Wright & Associates, LLC a Nasdaq Company, is a registered investment advisory firm. Registration does not imply any level of skill or training.

Dorsey Wright’s relative strength strategy is not a guarantee. There may be times when all assets are unfavorable and depreciate in value.

There are risks inherent in international investments, which may make such investments unsuitable for certain clients. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities. DWA, and its affiliates make no representation that the companies which issue securities which are the subject of their research reports are subject to, or in compliance with certain informational reporting requirements imposed by the Securities Exchange Act of 1934. Sales of securities covered on this site or in this report may be made in only those jurisdictions where such securities are qualified for sale. Investors in securities with values influenced by foreign currencies, effectively assume currency risk, because foreign-currency-denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, such securities.

Dorsey Wright receives index licensing fees on assets within the Invesco DWA Small Cap Momentum ETF (DWAS).

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