Market review 23.03.19
Hello everyone,
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Now, on to the weekly market recap.
Relative Strength
This week, I found myself posting mainly just ratio charts on Twitter. While many markets are in a sideways pattern, ratio charts are certainly telling us a clearer story.
And that story is that bonds, gold, and growth:value are bullish. The latter means favoring tech over stuff like materials, energy, and banks. In macro speak, all this equates to an easing of the inflation & interest rate pressures we saw all last year. Recent bank failures tipped us in that direction, although price action and positioning were signalling this for some time now.
The chart below summarizes everything in one neat picture:
While the past several years seem highly confusing on the surface, the chart above shows there’s really only been 2 types of markets: ones where rates are rising, and ones where rates are falling. What sectors and assets outperform is largely dependent on this dynamic.
Well before the ratio charts, the leadership board has been showing the emerging strength in tech and weakness in commodities for months now. Here’s how the board currently sits:
Things like semiconductors, gold, China tech, and bitcoin have made big moves in recent months. First it was KWEB that hit the leaders region, then XSD & SMH, and now GLD.
Meanwhile, banks, agriculture, oil, and materials have been hit hard. It began with UNG entering the laggards region, followed by DBA, and then more recently, KRE, OIL, REMX, LIT and others joined the penalty box.
Again, all this is consistent with an easing of the inflation/rising interest rate pressures that have had a stranglehold on duration assets.
I’ll explore all this with several ratios charts, before looking at assets on an absolute basis.
World ex-USA vs. Nasdaq-100, Weekly. This ratio broke down in early Feb and that trend accelerated this week, with QQQ up 6% and VEU down 2%. This tweet shows the same but broken down by several different global regions.
TLT vs. DBC, Weekly. 20yr bonds are breaking out relative to the broad commodity ETF. Some nice bullish RSI and ROC divergences as well.
SPY vs. IWM, Monthly. The large-cap S&P 500 index is breaking out vs. small-caps. This is not only a size preference (flight to large, liquid names), but also a move towards tech and away from banks & industrials.
COPX vs. GDX, Weekly. I have been watching this ratio for the past several quarters, favoring copper over gold. But this week, this ratio broke down hard.
Now let’s look at markets on an individual (absolute) basis.
Tech/Growth
The Q’s just printed a bullish engulfing candle on the weekly chart.
Individual charts for big tech (AAPL, AVGO, NVDA, MSFT) are some of the best ones out there right now. A more complete leadership list within tech can be found here. Charts for some of these leaders are here and here.
Gold
It’s interesting that I began this blog in Dec ’20 with a post on gold. While that wasn’t even close to the ultimate cycle low, it looks fairly clear now that this blog post from Sept showing WPM hitting decade-long support was it. Let me explain why.
XAU Monthly. This gold/silver miners index is lifting nicely after hitting 10-year support:
Several gold stocks are coming out of decade-long bases. Osisko (OR) really sticks out, so does AGI. I’ve been watching this OR chart for years now.
GDX leaders vs. GDX, Monthly. We’re seeing a decade-long breakout in leading gold miners vs. the broader GDX ETF.
Clean, monthly charts like these gold ones above make me whistle with interest. More gold setups can be found in this tweet.
Bonds
Just like QQQ printed a bullish weekly engulfing candle, 2-year Treasury Bonds are in the process of doing the same on a monthly timeframe (caveat: the month is not over yet).
In my blog from 3 weeks ago, I showed how Commercial Hedgers were uber long 2-year bonds. It turns out, they are also uber long 10- and 30-year bonds!
The mirror of bond prices is bond yields. Here’s the 1-year Treasury yield with a clean and strong breakdown on the weekly chart:
Again, this is inline with the breakdowns in COPX vs. GDX, banks vs. broad market, and global regions vs. QQQ (among other ratios).
Value & (Industrial) Commodities
We already discussed the breakdown in banks and materials last week. That weakness continued with KRE, OIH, and SLX down another -14%, -13%, and -7% this week, respectively. Ouch.
Airlines, railroads, and marine shippers have all broken down now.
Oil and the broader DBC made clean breakdowns this week:
It certainly looks like KRE:SPY, Natural gas, and the Baltic Dry Index were all good leading price indicators for these moves we’re seeing in rates, oil, and materials, respectively.
Finally, while gold miners hit multi-year support recently, XOP and several other energy ETFs hit multi-year resistance. Gold and oil stocks have been very negatively correlated in recent years – which makes sense if you think of gold as more bond-like while oil is the lynchpin to inflation.
Closing Notes
Since Jan, we looked at bullish setups in tech (specifically semiconductors). And for the past 3 weeks, we saw bullish evidence building for bonds. In last week’s post, it was clear we wanted to stay clear of banks and industrial commodities (materials, oil, agriculture) given their breakdowns.
One thing I missed in my blog posts for most of this year was gold. But after that failed breakout in COPX:GDX, I am bullish this space as well.
Combined, all the above is signalling a consistent story of easing interest rates / inflation pressures. The bifurcation within US sectors might be confusing many, but if the leading sectors are above breakout levels, we want some exposure.
One thing I want to clear up: While inflation plays are bearish short-term, the bigger picture is still bullish given the multi-decade breakouts we saw in the past several years. Also, it appears gold may be getting going ahead of other commodities, like the prior cycle.
I’ll leave you with these tweets to reflect on:
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.