Market review 22.08.28
Hello everyone,
Things got ugly on Friday with SPX closing -3.4% on the day.
The headlines are all saying the selloff is due to the Fed remaining firmly committed to raising rates. Which is silly, since the Fed just follows what the bond market is doing with a lag. It should be no surprise to anyone that the US 2yr Treasury yield remains in a firm uptrend.
Dampening inflation
Over the past year, high inflation has led to rising bond yields, which has no-doubt put a damper on stocks, especially high-duration growth stocks.
In last week’s post, I showed how resource sectors could continue to do well over the next several years. However, there’s some caveats to this (at least in the short-term).
#1: Commodity currencies & countries have not confirmed the move in the CRB index. In the 2003-2008 commodity bull market, these areas led the CRB higher.
#2: Copper, wheat, and many other commodities have very broken charts that could need time to repair.
#3: The Baltic Dry index (a measure of shipping activity for raw materials like coal and steel) has been in free-fall since May. The BDRY ETF is down 70% in the past 14 weeks!
It’s very possible that rising interest rates have been effective (at least in the short-term) at impeding inflation. Commodities & resource stocks can base for a while after the enormous run they’ve had. For example, Nutrien (potash producer) can base here for quarters:
If so, the broader stock market could hold up and slowly grind higher (albeit with plenty of chop).
Bull case for stocks revisited
It’s easy to lose sight of the big picture with days like Friday.
In the past couple months, I’ve been writing about how stocks (across many diverse sectors and countries) hit major multi-year support levels. For example, home builders held support dating back to 2005:
The Dow held the early ’20 highs before rallying.
Notice on the above chart how commercial hedgers got net long during the sell-off, just like they did in ’20 and ’15. And while the ‘smart money’ was getting long, sentiment was showing extreme bearishness.
The Investor’s Intelligence Sentiment Survey doesn’t get talked about much. But its ratio of bulls vs. bears reached below 1 at all the major lows since the ’08 crash. It happened again at this year’s market lows.
Sentiment remains bearish.
Want to see some signs of risk-on?
SPX:GDX Weekly. Broad stocks made a major 7-year breakout relative to gold stocks. Recall, gold tends to do well when stocks are weak and vice versa (link).
And despite Friday’s action, weed (MSOS) and China tech (KWEB) were up 9%-11% on the week. This is a sign of risk appetite.
Tech charts to watch
Growth stocks got hit the hardest in this inflation rout. If inflation is easing, we want to see these stocks hold recent breakouts. Some examples are shown below.
Closing Notes
It’s been a tricky market no doubt.
What seems likely is for broad stocks to hold the June lows (major support on monthly charts) and slowly grind higher for a while. Meanwhile, resource stocks (which made multi-decade breakouts in recent years), rest by grinding sideways for a while before eventually resuming their uptrends.
Three things help in this challenging market: diversify, keep it simple, and be patient. My motto, “Above line good, below line bad,” is as simple as it gets.
Enjoy the rest of your weekend.
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.