Market review 23.03.05
Hello everyone,
The broad equity market continues to be bullish, as it has been for at least 3 months now. It’s been a shaky uptrend, however, and so it’s been very important to zoom out, filter out the noise, stick to leaders, and remain long. We don’t want to do this:
This week, we got more bullish confirmation as many equity ETFs rallied after retesting base breakouts.
HYG:IEI (the lowest credit-quality bonds vs. the highest) just made a breakout this week, on a total return basis. Risk on.
Defensive sectors continue to be weak relative to the S&P 500. And we have multiple seasonality tailwinds here as well.
This week, I want to cover China, materials, and bonds – all areas I’m bullish on among others (including semiconductors and industrials).
China – a trading case study
The top performing ETFs off the Q4 ‘22 lows are China & Emerging Markets Tech (KWEB, EMQQ) and Materials (COPX, SLX):
Let’s look at the anatomy of the move in China.
Initial setup: Months ago, we were seeing VWO (the Emerging Markets ETF) hitting major 15-year support. Ditto for China’s Hang Seng Index.
From a sentiment perspective, thanks to years of underperformance, we kept hearing that “China is un-investable” and “China is in bad shape.” Meanwhile, the smart money was building a record long position in emerging markets late last year.
The spark: It’s when we heard the initial rumors that China was re-opening after a 3-year lockdown that the related ETFs were in the early innings of a sharp rally. Off the Oct lows, KWEB rallied 2x in just 3 months.
The pause: After that big move, price & sentiment got extended. Barron’s came out with their “How to invest in China now” cover in late Jan. KWEB fell 20% from its highs, and was among the worst-performing ETFs last month.
The next setup: The pullback was very healthy, giving a nice reset after such a big move. Prices fell to a confluence of support levels:
AVWAP from the Oct lows
Mid-BB
38% fib retracement
200-day (40-week) Moving Average
The next spark: This past Tues, we got another piece of positive news: “China's factory activity stuns with fastest growth in a decade.” KWEB was again a top performer this past week (along with materials), which should be no surprise given the confluence of support, momentum leadership, and smart $ positioning.
I want to elaborate on Tuesday’s PMI data (a measure of economic activity). Not only did China’s PMI just hit a 10yr high, it also did so relative to the US. But what’s really interesting is the positive divergence between China vs. US PMI and the Hang Seng vs. S&P 500 ratio:
A very different set of data also shows that economic activity in China is at multi-year highs (link).
I am NOT suggesting we become economists. I am illustrating how price & positioning was alerting us to the setup in China well before we got alerted of the news and economic reports.
This discussion on emerging markets nicely leads us into materials, as copper has been highly correlated with EEM for 25+ years.
Materials
As I’ve been highlighting for over a year now, SLX retested a multi-year base in late ‘21 and again last year. Currently, it’s breaking out of a smaller, 2yr base.
I love it when I find a clean-looking chart that ends up being one of the best segments of the market over the next several quarters and years.
Copper stocks are also strong. A well-known copper producer here in Vancouver is Teck Resources. TECK dug into its base before springing higher this week. It’s a momentum leader and I’m long.
Aside: Over the years, Teck has become more than just a commodity producer and more of an IoT / data analytics company. They built a large team of software developers and data scientists. I interviewed with them years ago but didn’t get hired. 🤷🏽♂️
With the rally in materials now a few months old, an interesting thing is happening. Last month, gold miners took a hit but GDXJ outperformed GDX.
Looking more broadly, the TSX Venture Exchange (consisting of more than 50% in micro-cap materials stocks) has been outperforming the broader, large-cap TSX index.
Market participants are going out the risk curve into more speculative parts of the mining sectors. It’s a lot like how the ‘20-21 crypto rally began with BTC outperforming, and then the alts.
Here’s how leadership looks within the TSXV, if you’re looking for ideas in this space. Bubble sizes represent market cap.
Here in Canada, companies & insiders have to report their transactions to SEDAR, which releases them to the public almost in real-time. This is another way to screen names on the venture exchange (ie. which ones have the highest insider buying?).
Another high-torque way of playing the materials space is via the BDRY ETF. According to the issuer’s website, BDRY is “a pure-play exposure to dry bulk shipping, an instrumental part of the global commodity market, uncorrelated to other major assets.”
What I like is how BDRY has provided clean breakdowns and breakouts before starting clean trends of big magnitudes. Lots of people have their attention on Natural Gas in the hopes of catching big moves, but BDRY is a cleaner instrument and one you don’t hear many talking about. The only downside is it has low volume. Checkout the recent failed breakdown and subsequent rip:
Bonds
You like how I switched from high-flying micro-caps to boring bonds? 😊
Bonds have big intermarket implications. I want to reiterate what I said in last week’s post: Be careful being too bearish bonds (and bullish rates) here.
For one, checkout the TLT weekly chart. It made a nice reversal candle off mid-BB support this week:
Going down the yield curve, 2yr bonds are also on support – both on the daily and monthly timeframe: Link.
Finally, the smart money is record long 2yr bonds as I showed in last week’s post.
Closing Notes
The broad equity market continues to be bullish, as it has been for at least 3 months. Some of the most attractive parts of the market are emerging markets (esp. China), tech (esp. chips), materials (esp. copper, steel, potash, chemicals), and industrials. Finally, don’t get too bearish on bonds.
I’ll leave you with these tweets to reflect on:
And an important thread:
That’s all for this week! If you found this post useful, please give it a like and share. Thanks for reading.
Twitter: @alphacharts.
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.