[Premium] Q4 Playbook (Part 1/3)

Let's start with some monthly charts, which help us filter out the noise and focus on the structural trend. Here's the S&P 500, which just broke out of a nearly 2-year long consolidation after meeting our 2015-2016 breakout target near 2,800 and correcting. Now that prices have broken out, our long-term upside target is 4,100-4,400.

Click on chart to enlarge view.

Here's the Global 100 Index breaking out to new all-time highs as well.

The Global Dow is also just shy of all-time highs and still above the former highs set in 2007.

The MSCI World ETF (URTH) also broke out to new all-time highs and is well on its way to our target.

Besides these diversified indexes, the number of global stock market indexes breaking out to new highs and confirming uptrends continues to expand. Here's the Euro Stoxx 600 making new all-time closing highs after going nowhere for the last two decades.

Here's another perspective using our Equally-Weighted Developed Market Index, which is also making new all-time highs.

Here's the Equally-Weighted BRICKS index also ripping to new all-time highs after a successful breakout and retest.

Structurally, Emerging Market stocks still look poised to underperform their Developed Market peers. Nice long-term base, but no reason to suspect things are going to accelerate strongly here just yet.

We've established that Equities are in an uptrend, so now let's take a look at some of their alternatives.

Here's the benchmark US 10-Year Treasury Yield. At the start of 2019, Wall Street was looking for Rates to head above 3.00%, but instead, they got cut in half. Now, as Rates have stabilized, Analysts are predicting that they stay right where they are into the end of 2020, just shy of 2.00%. We've been looking for higher Interest Rates since our downside target was met late last year and are encouraged by the intermarket signals that are pointing to higher rates as well.

In the Commodities market, the Copper vs Gold ratio is attempting to bottom and turn higher. In the Equity market, Regional Banks vs REITs are also trying to turn higher. Improvements in both of these areas suggest that Commodity and Equity market participants are pricing in higher Interest Rates, not lower ones. We've not gotten confirmation from the 10-Year Yield, but it has formed a similar base that's trying to resolve higher.

Meanwhile, Rates around the world are starting to roll over again in the near-term following their lows in August. For now, we're watching to see if they can stabilize and continue higher, or if they roll over to new lows. We're betting on the former, but would rather be expressing this thesis through other asset classes rather than buying or selling Bonds. The reward/risk setup is just not there.

US Stocks recently broke out vs Bonds, reinforcing our view that we'd rather be long Stocks than Bonds. This exact type of breakout occurred in 2013 and 2016, before stocks when on to run further on both an absolute and relative basis.

Additionally, the recent outperformance from Treasury Inflation-Protected Securities relative to Treasuries of the same duration suggests that Bond market participants are beginning to price in an uptick in inflationary pressure. We've not seen this since early 2018, so it is a big deal.

Another asset class we could invest in is Commodities, which appear to have put in a structural bottom after testing long-term support and then breaking out above a decade-long downtrend line. Momentum is also getting overbought, which we haven't seen in quite some time. Continued price and momentum improvements in this Equally-Weighted US Commodity basket suggest we want to be erring on the long side of the broader asset class for the first time in more than a decade.

Currency markets are also confirming this improvement in Commodities. The Canadian Dollar and Australian Dollar are both highly levered to global economic growth, and therefore, Commodities. Continued price improvement in these two pairs is positive for Commodities and Rates.

We've been bullish on Copper for several months as prices briefly undercut support and quickly reversed. Commercial Hedgers still have one of their largest net long positions in history, suggesting the "smart money" is looking for continued upside in Copper prices.

Copper is specifically important for Emerging Markets, so that's why we keep a close eye on it. Higher Copper prices are great for Emerging Markets on an absolute basis.

Something else that may also be a catalyst for Emerging Markets on an absolute and relative basis is a weaker US Dollar Index. Here's the ratio of the S&P 500 vs Emerging Market stocks overlayed with the US Dollar Index, showing their positive correlation. A weaker Dollar would be supportive of Commodity prices, and likely, Emerging Markets.

Here's the Trade-Weighted US Dollar Index potentially confirming a failed breakout after making 20+ year highs on waning upside momentum. Although there's been little movement in the traditional US Dollar Index, a lot of the non-G10 currency pairs had been making new lows relative to the US Dollar and are now reversing course. We're watching pairs that had previously led like USD/SEK, USD/TWD, USD/BRL, that are now breaking down as an early warning signal of further US Dollar weakness to come.

Here are the other nine G10 currencies on an equally-weighted basis, back above support after hitting its lowest level in more than a decade.

Before we get into India's big-picture view of these assets, let's review.

Stocks are in a structural uptrend. We want to be buying weakness in this type of market.

Commodities in the US have bottomed, with Precious Metals leading the way and Copper/Base Metals trying to follow suit. Staying on the long side of this asset class makes sense.

Interest Rates around the world are trying to find their footing. A rising rate environment would make sense if Commodities have bottomed. We're stuck in no-man's land here, but have an upward bias in Rates given our view on Commodities. We do not want to be long Bonds.

The US Dollar appears to have topped, which fits with the thesis that Commodities have bottomed. We do not want to be long the US Dollar against most currency pairs.

Now that our macro view of the four major asset classes is outlined, let's take a look at Indian markets specifically.

India continues to perform in-line with the rest of the BRICKS nations, with little evidence suggesting longer-term outperformance or underperformance just yet.

Using US ETFs we see something similar, a choppy mess of relative performance. No reason for us to think India will outperform its peers right now, not until prices get back above support/resistance near 0.88.

Meanwhile, big picture, the absolute trend for the Nifty 500 remains positive. Despite a 2-year consolidation that's yet to be broken out of, the breadth thrust we saw in September suggests strong forward returns following this type of 99th percentile reading.

Here are the numbers we ran back in November, showing that after the % of new 63-day highs hits an extreme level, as it did in September, forward returns are far better than average for Indian stocks.

The biggest issue for India remains the divergence between Large and Small-Cap stock performance. While the Nifty 50 is pressing up against all-time highs, the Nifty Small-Cap 100 Index remains more than 35% off its 2018 highs. Similar underperformance has occurred in the Mid-Cap segment of the market as well.

Here's another look at this divergence using our Equally-Weighted 10 Largest Nifty 500 Stocks Index.

With that being said, we think that 2020 could be the year we see rotation back into the Small-Cap segment of the market. Here's the ratio of the Nifty 100 vs Nifty Small-Cap 100 Index reversing from its 2013 highs as momentum diverges. If a top was going to form in this ratio, this is a very logical level for it to begin.

The other reason we think this ratio could turn around here is because of the global stock market environment we're currently in. In early 2018 when this ratio made a low and began to rally, we were in an environment where stocks around the world stopped going up and market participants positioned themselves defensively.

Today, we're seeing the exact opposite. After 2 years of consolidation, market participants are beginning to take risk again as more and more stock markets around the globe break out to new multi-year/all-time highs. If this trend continues, then we'd expect Indian market participants to also put money to work in the "riskier" Small and Mid-Cap segments of the market, particularly if the Nifty 500 breaks out to new all-time highs and begins trending again.

Speaking of the Nifty 500, here's the daily chart back at the top of its 2-year range as momentum wanes once again. While we expect an upside breakout sometime this year, it's unlikely unless we start to see that rotation back into the weaker Mid and Small-Cap areas of the market. We think that's the higher probability outcome.

To be clear, we want to continue erring on the long side of Indian Equities and looking for rotation back into Mid and Small-Caps to drive them higher.

From a Commodities perspective, things in India are not as strong as they are in the US. With that said, it's an area we'd prefer to be erring on the long side of anyway.

Base Metals continue to struggle. Even Nickel, previously the strongest of the group, can't find its footing. Best to stay away from this area for the time being.

Precious Metals, on the other hand, have been an area we continue to like on the long side. We issued an update a few weeks ago suggesting the next leg higher was coming and we got just that. Any weakness in Gold can be bought as long as prices are above 37,000, with a target up near 44,500.

Structurally, Silver needs to break above 49,500 to become interesting from a reward/risk perspective.

Tactically, we were buying Silver down near 43,600 and are now approaching our target of 48,650.

Cardamom is also meeting our upside target near 4,040. If you want to be long above that level then our next target is 6,200, but we'd look for some consolidation first given the sharp rally its had over the last few months.

Crude Palm Oil is also meeting out upside target. As long as prices are above 780, then we can stay long with a target near 1,045, but some consolidation would be healthy first.

Rapseed Mustard is also hitting our target of 4,600. Some consolidation is likely needed after strong gains over the last few months, but as long as prices are above 4,600 then we can define our risk on the long side for a move towards 5,150.

Crude Oil spent most of 2019 basing, which is really constructive and sets it up for a move higher. A breakout above 4,650 would confirm the start of a new uptrend and target 5,675. Below that, there's nothing to do.

From an Interest Rate perspective, India is in a very similar place to the rest of the world. We're betting on higher rates globally, but need to see how much they give back during this move lower and if they break to new lows. The trend is sideways, for now, so we have to see which way the last 6 months of action resolves.

From a currency perspective, the Rupee still looks vulnerable. As long as USD/INR is above 69, the bias is to the upside and our target remains 80.

As long as prices of EUR/INR are above 77.80, then our bias is higher towards 87.75.

If prices can get decisively above 94 in GBP/INR then there's potential for a move towards 104.

JPY/INR could move up towards 0.72 if prices break above 0.67, which it looks like they're setting up to do.

That's our big-picture view of the 4 major asset classes based on the evidence we have today. Now you can move on to Part 2 which will talk Indian sectors on an absolute and relative basis.

Read Part 1, Part 2, and Part 3 for our full outlook and please let us know if you have any questions.

Allstarcharts Team