December Conference Call: 5 Key Takeaways

1. Defensive Assets Confirm Risk-On Posture

We continue to look for additional data-points to either further support or counter our present outlook that we are in a risk-on environment and one that is conducive for higher stock prices.

Here is a summary of some of the most common defensive assets that we track, charted relative to the stock market.

As you can see, all of these ratios are in serious downtrends, illustrating that relative to all of these other asset classes - the alpha remains in the stock market.

While these aren't the only risk-appetite ratios we look at, they are definitely some of the most important.

We are keeping an extra watchful eye on the Staples vs S&P relationship right now as it tests a critical level. Read JC's recent post about the subject for more on this.

2. Falling Spreads And Rising Stock Prices

New highs in stocks are being confirmed by more and more intermarket relationships and asset classes. Here's another bullish development from the bond market, which has an excellent track record in terms of identifying stress in equity markets.

High Yield credit spreads are contracting, and have been since stocks bottomed in March.

Notice the trend of consistently lower lows in these credit spreads. This is the complete opposite of what we were seeing ahead of the selloff in Q1 as all of these spreads blew out to their highest levels in multiple years.

As long as these spreads continue trending lower, evidencing that investors are favoring higher risk debt instruments rather than Treasuries, we can continue to feel comfortable that the stock market and risk-assets in general remain in good shape.

3. Stock Market Suggests Higher Rates

Speaking of Treasuries, all signals are pointing to higher rates and lower bond prices right now. Whether we look at our intermarket indicators from the commodities market such as Copper vs Gold, or other asset classes, everything is indicating higher rates.

Here is yet another intermarket ratio from the stock market that we use to get a read on the future direction of rates. Here is Small-Caps vs Large-Caps with the 10-Yr Yield overlaid on top.

We continue to see more and more of these interest rate barometers turn higher and break above key levels. We can now add IWM/SPY to that list as prices just rocketed above their year-to-date highs.

The bottom line here is simple. Not only are relationships within the stock market pointing to higher yields, but we're seeing this kind of action across all asset classes. The weight of the evidence is piling up more and more in favor of a breakout in yields to catch up to these ratios. Only time will tell.

4. German DAX Ready To Resolve Higher

We talk a lot about the strength, rotation, and healthy internals among US Equity markets. But, what's going on internationally?

Take a look at this multi-year base in the German Dax. Are German stocks finally going to resolve higher?

We've been asking this question for years and with every subsequent test the odds of a breakout increase. It is starting to look as though this fourth time may be the charm with the DAX looking poised to close out December at its highest monthly close in over a year.

New record highs for one of the world's largest and most important developed markets would be a major development. This would be supportive of the broadening in participation we've seen in developed Europe of late, but just as importantly, would be another confirming data point for the new highs were seeing in US Equities.

5. Potential Comeback For Former Leaders

We've harped on the outperformance from Small-Caps for many months now. But just recently, we have started to see evidence build that SMIDs, and the relative strength from smaller stocks in general, may need a period to cool off a bit.

In our view, this couldn't be happening at a better time from a rotational standpoint.

While small-cap stocks have been on a tear since early September, many of the former leading sectors such as large-cap tech, discretionary, and communications have consolidated in a sideways range during the same time.

After booking such hefty gains off the March lows, this digestive action was a healthy and welcomed development. We're starting to see these same areas break out to new all-time highs for the first time in months recently. The fact that this is occurring just as small-caps look ready for a breather speaks to healthy internals and market cap rotation.

We expect to see some mean-reversion back in favor of the former leaders at least over the short-term, potentially longer.

Those are some of the main takeaways from this month's call.

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Thanks for reading and please let us know if you have any questions!

Allstarcharts Team