SP 500 Hasn't Broken Out…Yet. But the Clock is Ticking.

It’s a conundrum. So close, but yet so far. The S&P 500 failed to break out into a new BULL market. But depending on what happens with inflation and the Fed, we could get a breakout soon, writes Kenny Polcari, managing partner of Kace Capital Advisors LLC.

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Tech went on sale on Wednesday. Well, let’s not get crazy, but there was a bit of re-allocation by some investors as they have decided to ring the cash register on recent gains and re-allocate it to Industrials +1.6%, Financials +0.4%, Utilities +1.7% and Real Estate +1.8% — sectors that have not been participating so much year-to-date.

Tech is clearly just a bit overdone. Weakness across tech gave way to more than 1.3% losses in the Nasdaq index, while the big megacaps (that have been driving the action) fell even further. In the end, expectations of holding rates at these ‘high’ levels will weigh on tech shares until everyone gets more comfortable.

Banks appear to be taking the lead – this after they have gotten slammed post the bank failure hysteria. The Financial Select Sector SPDR Fund (XLF) is down 3% YTD, the SPDR S&P Bank ETF (KBE) -14% YTD, and the SPDR S&P Regional Banking ETF (KRE) -23% YTD. On Tuesday, we saw the XLF rise by 1.3% and the KBE gained 4.3%. KRE rose 5% as investors are finding value and opportunity in space.  Yesterday the party continued, with more money moving into the financials.

Energy also did an about face. The sector rallied on Monday morning and then sold off Monday afternoon and Tuesday on the idea that China wasn’t growing as fast as suspected and on the idea that the Saudis were not really committed to cutting production for any specific length of time. But Wednesday, we saw oil rally by 1.25% to end the day at $72.63/barrel.

That’s still well below the trendline resistance at $74.80 and well below the $80 price target that the Saudi’s need (and want). But there was a change of heart when China reported that their crude imports ROSE in May – this despite a decline in overall Chinese imports of all products. Additionally, US supply data was more bullish than expected as US refiners really kicked up (refining) activity.

And “SMIDs”? Small/Mid-Caps? They too appear to be getting some love by investors as they look elsewhere for opportunity in what could become a ‘soft landing’ engineered by the Fed. Investors are searching for the next opportunity as we enter the second half of the year, and IF the Fed can really pull it off (soft landing) then I would expect to see a roaring rally in this sector as well.

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Just look at the iShares Russell 2000 ETF (IWM). It’s up 8.5% this week, taking it to up 8.1% YTD. See that? Going from negative to positive on the year in four days. Clearly money IS moving in and moving in fast.

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