The Monday Morning Playbook: Week of July 29, 2024

Good morning,

The legendary technician John Roque once told me, “We’re not in a reversion to the mean business, we’re in a reversion beyond the mean business”.

That’s feeling pretty damn true in July.

As recently as July 10 (the day before June’s CPI report was released) the YTD return for large-cap growth was +28.2%. For small-cap value, it was -1.5%, a remarkable 29.7% spread.

Now, not even three weeks later, that spread has shrunk to less than 8%.

Now, we’re in the business of following trends, but one trend I don’t expect to continue is the Mag 7 and semiconductors continuing to fall while small caps rally.

And late last week we saw a glimmer of hope on that front with multiple reversals on Thursday and an “everything rally” on Friday.

It would be absurd to call the all-clear on tech ahead of this week, with 4 of the Mag 7 reporting. I’m not here to make earnings calls or guess the reaction. But looking at price and the internals I would call this group “kinda oversold” meaning we should be in the ballpark of the ultimate low but it also wouldn’t be a surprise to see one final flush lower.

However it shakes out, I want to make stocks over bonds my biggest portfolio bet. On a relative basis, we want to stick with small-caps and cyclicals that are working, but be aware that they’re starting to get short-term overbought.

Finally, last week saw some defensive strength which we’ll look at in today’s report. But with small caps up big again, the Dow breaking out, credit spreads contained and those sectors making moves higher in absolute terms, this looks to just be part of the rotation and not a cause for concern.

This week’s report will review:

• The S&P 500 and another strong day for breadth

• Just how oversold tech stocks are

• Key levels following last week’s reversal patterns

• Defensive sectors

• Bullish big-picture charts

• Rate ahead of the Fed decision

• and more!