As we near the end of April, the overall market outlook for the upcoming month is not particularly optimistic. Key market sectors such as the stock market, as represented by ETFs like the Spyder Trust (SPY) and Invesco QQQ Trust (QQQ), have been trying to rally from recent lows but have not shown significant strength. Last week’s action indicated a possible end to the correction, however, concerns about a potential retest of recent lows remained.
During Tuesday’s trading, market breadth on both the NYSE and Nasdaq indicated a negative bias, with a significantly higher number of declining issues compared to advancing ones. Despite positive advance/decline numbers on the NYSE, the S&P 500 remained flat on Monday, leading to doji formations in SPY and QQQ. By Tuesday afternoon, both ETFs were trading below the doji lows, suggesting potential further downside.
Sector performance for the month of April has been lackluster, with only two sector ETFs in positive territory – Utilities (XLU) and Energy (XLE). All ETFs are currently trading above their yearly pivots, indicating potential support levels during pullbacks. Real Estate (XLRE) is currently the weakest sector, trading below its yearly pivot. Technology (XLK) and Communication Services (XLC) sectors have performed relatively well year-to-date, despite recent declines.
Technical analysis suggests that XLK is likely to see further downside, potentially testing support levels around $178.20. XLC, on the other hand, has strong support levels at $71.57 and a positive volume pattern. XLI broke out in December, completing a trading range and targeting the $135 to $140 area. XLE’s breakout above resistance at $94.44 is seen as a positive sign, with potential support at the yearly pivot of $82.88.
As most sector ETFs are expected to open below their new monthly pivots in May, short-term momentum is likely to be negative. With the traditional financial advice of “sell in May and go away” in mind, monitoring pivot levels and daily technical studies will be essential to identify potential trends. The relative performance (RS) analysis remains an important tool for determining leading sectors, suggesting ongoing caution in the market.
