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Battle of the 'flations
Happy new year, everyone!
The first week of 2022 was definitely an eventful one for the markets. The inflation trade did well with BRK, XLF, XLE up 5-10%. Meanwhile, the disinflation trade got hit with GLD, TLT, XLRE, VUG all down 2-5% (even our Q4 winner, LAND, wasn’t spared).
The question that’s being asked is - how long does this rotation last?
In my last post (“Mega themes”), I used monthly charts to make the longer-term case for disinflation. As long as the MSCI Growth:Value ratio stays above the 50yr breakout level shown in that post (15-20% below where it is currently), this thesis holds.
But in the medium-term, the evidence is telling us to be bullish on the inflation trade. Let’s explore why.
The chart below shows how closely banks, oil, uranium, and bond yields have tracked. And collectively, this complex is coming out of a multi-month base.
I’ve annotated this chart to show my last two blog posts on the inflation trade. On Nov 9, there were signs telling us to be bearish. Then after a pullback, the evidence was saying to be bullish by Dec 13. We’ve seen great follow-through since.
The action we saw this week is nothing new. For the past ~10 months, the ETF leadership board has been showing that the inflation trade has been leading (with XLF, XLE currently at 52-week highs) while gold & high-growth are struggling (near 52-week lows). We want to listen to this relative strength above all else!
OK. Let’s take a look at price charts.
Value & Banks
BRK Weekly. Berkshire made a powerful breakout from a beautiful 8-month base.
In ‘20, BRK did nothing while ARKK almost tripled. Cathie became loved and Buffett was said to be out of touch. But in the past year, that wide performance gap between ARKK and BRK has almost fully closed. Markets never cease to amaze.
XDV Weekly. This is a Canadian dividend ETF yielding 4% and is heavily weighted in financials. Like BRK, it’s making an 8-month breakout but is not as extended. Also, the monthly chart shows a 7-year breakout last year.
MS Weekly. Individual financial stocks look great. Here’s MS setting up within a strong uptrend. GS looks similar.
Oil, Uranium, Materials
ENB and CNQ, Monthly. 8 and 14yr base retests last month, now running strong.
Weekly charts for many oil names look fantastic. Checkout DVN and OAS. In the uranium space, PDN, GLO and FSY weekly charts are setting up nicely.
SLX Monthly. Lifting off after retesting a 10yr base.
This SLX chart was also in my last inflation-trade post. It and the ENB, CNQ monthly charts above certainly make a compelling long-term case for commodities.
More strong stocks in the materials sector to checkout include: AA, TECK, and IVN.TO.
Transports & Travel
Autos have been on fire. Below is TM breaking out of a 6-month base. Note it also made a giant 15yr breakout in late ‘20. Also checkout weekly charts for F and TTM.
Dow Railroads Index, Weekly. The rails are picking up steam.
JETS Weekly. False breakdown. Could this be the next to get going?
UUP Monthly. This US dollar fund is hitting 14-year resistance.
At the start of last year, commercial hedgers (‘smart money’) had their biggest US Dollar long position in 10yrs. The Dollar rallied, putting the brakes on industrial commodities for many months. Now they have their biggest short in 5yrs. Meanwhile, commercials have their biggest-ever long in AUD (a currency highly tied to industrial commodities).
For the past 2 weeks on Twitter, I’ve mostly been posting setups within the inflation trade. Today’s blog was an organized summary of all those tweets. You can find my work in real-time here: @alphacharts. Thanks for reading.
Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do your own due diligence.