Market review 23.12.17
Hello everyone,
The blog turned three this week!
Thank you to all members for the support - I do my best to deliver value to you.
With this weekly blog, I aim to present a simple overview of global markets by combining relative strength, price charts, positioning data, and intermarket correlations. I use this analysis to determine which asset classes, sectors, and global regions to allocate to and when.
Despite the intermarket twists and turns, it has been a decent year of trading. The model portfolio hit new highs this week:
The above result was mainly achieved through ETFs and placing trades one day per week (on average). This chart started in May when I began sharing trades in real-time on our private X feed.
You can take things further and find individual stocks with the highest potential (based on relative strength, breakouts, institutional filings, fundamentals, etc.). I occasionally show stock ideas and hold them in my accounts.
Today, I’ll begin with an intermarket overview before going into specific sectors in more detail. Let’s begin.
Intermarket Analysis
The weekly chart for the US 1-year Treasury yield helps give a summary of the past five years:
Rates dropped during the ‘18 and ‘20 equity market correction to help cushion the fall.
Rates hitting zero subsequently boosted risk assets in ‘20-21. With a lag, inflation appeared and hit multi-decade highs by late ‘21.
Rates began climbing rapidly in ‘22 to fight inflation, which hurt risk assets.
With inflation abating, rates have dropped since October while stocks have been rallying.
It was two years ago that inflation & interest rates began a robust negative correlation with risk assets, as seen in the table below. This table also shows that markets have returned to disinflation mode since October.
While rates have been topping over the past year, we’ve seen numerous major breakouts in diverse parts of the equity market in May and since early November. We got a rare bullish breadth thrust signal in January and again in October. We also saw how commercial hedgers became record-long stocks and bonds in the summer.
This week’s “big” monthly inflation report and Fed announcement echo what price and positioning had already been telling us for a while. Markets now expect rate cuts next year, and the “soft landing” narrative (ie. inflation has been killed while the economy remains strong) gained voice. Risk assets soared, led by small-caps, regional banks (KRE), and tech (XSD, XBI, TAN).
Undoubtedly, we want to remain bullish stocks, but I always like to ask: how much runway could we have?