SPY and QQQ Seem Overbought but RSP Looks Attractive

After a blazing begin to 2024, led by AI-fueled tech enthusiasm and the Fed’s dovish pivot, U.S. shares might need additional room to run. Nonetheless, excessive valuations demand that merchants and buyers alike turn out to be extra selective. For fairness index merchants, this implies wanting past the S&P 500 (SPY) and Nasdaq 100 (QQQ), that are dominated by massive tech, for engaging values with robust long-term potential.

One potential thought could be S&P 500 Equal Weight Index, as proxied by the exchange-traded fund RSP (Invesco S&P 500 Equal Weight ETF).

Whereas the SPY and QQQ have rallied 67% and 36% respectively since 2023, RSP is up lower than 18%, suggesting room for catch-up. RSP’s equal weighting methodology additionally mitigates the dominance of mega-cap names, permitting for diversified publicity to a broader spectrum of firms within the U.S. market.

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SPY, QQQ & RSP Weekly Chart

Supply: TradingView, Ready by Diego Colman

A number of elements may propel RSP greater within the second quarter. U.S. financial situations seem like stabilizing, with recession fears lessening. This bodes effectively for threat belongings, particularly a number of the smaller or beforehand lagging firms which have larger illustration inside an equal-weight index.

The truth that the Fed will quickly transition to a looser stance must also be seen as a optimistic catalyst. At its March assembly, the U.S. central financial institution indicated that it stays on monitor for 3 price cuts this yr regardless of slowing progress on disinflation. This alerts that policymakers might now be prioritizing financial progress, even when which means tolerating considerably greater inflation for some time.

The RSP ETF affords a manner for buyers to achieve publicity to the broader S&P 500, probably uncovering undervalued alternatives. Because the economic system stabilizes and the Fed’s easing cycle approaches, RSP may very well be well-positioned for a strong second quarter.

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The right way to Play the Bullish Technique?

RSP breached its file set in January 2022 this quarter, briefly climbing to a brand new all-time excessive above 168.00. An strategy to capitalize on this current breakout may contain awaiting a pullback. If the earlier peak close to 165.00, which as soon as acted as resistance could be confirmed as help, that might point out that costs have established a short-term flooring from which to provoke the following leg greater. On this state of affairs, a rally in the direction of 168.00 may very well be on the horizon. On additional energy, all eyes will probably be on 178.00, the higher boundary of an ascending channel in play since October 2023.

On the flip facet, if 165.00 fails to offer help on a retest and costs dip beneath it decisively, the bullish thesis could be compromised however not fully invalidated. Below such circumstances, a retracement in the direction of the 50-day easy shifting common round 161.10 may probably unfold earlier than RSP regains a foothold and mounts a comeback. Nonetheless, if this technical space can also be taken out, sellers may stage a resurgence, invalidating the near-term constructive outlook.

RSP Weekly Chart

Supply: TradingView, Ready by Diego Colman