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US stocks (^DJI, ^IXIC, ^GSPC) open Tuesday's trading session just a smidge in negative territory as Wall Street experts are wary of a potential stall to the market rally. Simultaneously, retail investors have flocked back to markets as many participated in buying the dip in April. But should investors be selling the rip rather than buying the dip right now?
LPL Financial Chief Technical Strategist Adam Turnquist joins Madison Mills on the Morning Brief to check what the technicals are telling about the direction equities are heading, as well as the bond market (^TYX, ^TNX, ^FVX) as the 30-year Treasury yield flirts with its 5% benchmark.
To watch more expert insights and analysis on the latest market action, check out more Morning Brief here.
And it is time now for today's strategy session. The question facing those investors, do you sell the rip or do you buy the dip? Our next guest saying the technical indicators are favoring the ladder. Here to break it down, Adam Turnquist, LPL Financials, Chief Technical Strategist. Adam, great to have you this morning. I just mentioned some data indicating retail investors keep buying even at these levels. Are the retail investors right to continue to buy the dip?
We think so. When you look at the technicals over the last month, we had enough boxes checked on the capitulation on the downside. We got the extremely oversold conditions, indiscriminate selling. We had washed out breath readings and now on the other side of that equation, we have the recovery. And we think you are again checking enough boxes here to set up for a buy the dip playbook. We're seeing breath thrusts off the lows, notable number of stocks getting back above their key moving averages, leadership importantly shifting to more cyclical sectors. We're seeing that in industrials breaking out to new highs, consumer discretionary starting to outperform as well. So we think that playbook aligns with more of a buy the dip backdrop for equity markets. It does alleviate some of the pressure of potentially retesting the lows from April. We think that's an unlikely scenario right now.
And Adam, what exactly should that dip buying activity look like? Like is it all created equal? Is it across the index that investors should be looking? Is it specific to tech? What are the attractive corners of this market?
Just at the broader index level, we'll start there with the S&P 500. We did gap above the 200 day moving average last week. So that would be a notable spot where you'd see potentially some support if the market starts to fill that gap. And then at the sector level, we think with that leadership changing to more cyclical areas like financials, that's an area we have an overweight view on. Communication services has been a consistent outperformer, great fundamental backdrop, great technical backdrop. Those would be spots we'd be adding to positions right now on any type of weakness.
Is tech still defensive in this market?
I think tech is now more of a barometer for risk and one of the things we were looking for in terms of that checklist to identify a sustainable recovery versus a bear market rally is tech participation. And not necessarily tech leadership, but we're actually getting tech leadership. We haven't seen semiconductors quite break out yet, but overall the tech sector participating in this rally and so far early signs of some leadership there, certainly a great sign for a sustainable recovery here given the fact that the tech sector is about a 30% weight in the S&P 500.
Yeah, and it's interesting because I'm also hearing some folks say maybe you look at the equal weighted S&P 500 given that sector weighting for tech in your S&P 500 more broadly. Having said that, I am interested in what we're seeing in the bond market, if we could take a look at yields for a moment, because it's interesting to see yields as a potential headwind for stocks because you're starting to get a little bit more bang for your buck when it comes to the bond market versus what we're seeing in the stock market in terms of earnings. How are you thinking about bonds as a potential competitor to stocks?
Probably thinking about bonds a little too much. I'd classify that as what keeps me up at night, that category, because with the 10-year treasury yield right around 450, there's not a lot of margin of error here when we're talking about a breakout above 458. That's a key resistance level for the 10-year yields. If we break that level, that would mark a further move out of this bottom that's formed over the last month or so and leave kind of 480 as the next area of overhead resistance. I find it hard to believe if we're talking about the 10-year rallying up to 4.8% that the equity market rally continues. We think that could spill over into some risk off sentiment and pour some cold water on this red hot equity market rally right now.
And talk to me then about kind of where you're seeing opportunity across the yield curve. Is this a chance for investors to get into the 30-year yield when you do see a little bit more of that yield as it hit 5% on Monday, or should investors say that's a little too risky given the concerns about the Fed and growth going forward?
We think we're getting close to an opportune time to add duration right now, maybe not quite there yet. Again, if we start to see, for example, the 10-year break 458, we get a 475, 5% type 10-year, that's a new discussion in terms of duration, and the same thing on the long bond through 5% or north of that would be an area that we'd start talking about adding duration. But right now, when you look at the front end of the curve, you don't really need to take a lot of duration risk to add attractive yields and attractive income for portfolios right now. So we don't think you need to go into high yield. We think you can stay within more of the high quality areas of the market and you don't need that added duration risk at this point.
