June Conference Call: 5 Key Takeaways

1. Sideways Is The Standard For Year 2 Of A Cycle

There is no doubt markets have been a hot mess over the past few months. We have been pounding the table on this theme and see little evidence that these messy conditions are likely to be alleviated any time soon.

Sideways. Trendless. Rangebound...

"Chop, chop, chop" is the trend for stocks and many other risk assets right now.

Two areas of the market that really illustrate this story well right now are Micro-caps $IWC and Small-caps $IWM.

Both IWC and IWM have been chopping around in a messy range, printing a series of false starts... or failed breakouts. We won't know which they are for sure until we get a decisive resolution from these holding patterns. 

For now, we don't want anything to do with these charts as they remain stuck below overhead supply near their February highs. And both recently failed to hold above key areas of former resistance….for the second time in three months! 

This kind of price behavior has been the norm this year as investors continue to face a challenging market environment. And these failed moves in both IWM and IWC simply reinforce our view that these choppy conditions are likely to persist for the foreseeable future.

On the bright side, a prolonged period of sideways price action is perfectly normal for year 2 of a bull market cycle. As such, while the market is trendless from a tactical standpoint, we continue to believe an upside resolution eventually takes place as the primary trend remains intact and higher.

The question is simply how long does it take... AND, how bad can things get in the meantime...?

2. What To Look For If Things Get Worse

To answer that last question, YES! Things can most certainly get worse from here. But how will we know if and when this is happening?

Well, there are a number of risk assets at inflection points right now that we're looking to for an early read on which direction markets take from here.

The European Banks Index $EUFN is one of our favorites:

If European Banks drop back below former resistance near 20, international stocks are most likely under pressure.

And if that’s the case, then the global growth and reflation narratives are probably running into some trouble too.

EUFN below 20 is definitely a scenario where markets are messier for longer. In fact, we're likely seeing a lot of things correct through price as opposed to time if this is the case.

So if and when things start to get worse, where should we turn our focus..?

3.  "Bonds. Cash. Champagne."

That’s right...bonds, cash, and maybe even some champagne and fishing!

It’s been the play over the last few months, and it will continue to be the play if things worsen. Cash, patience, tight risk levels, and positioning smaller have all served us well of late and we think they will continue to... Especially, if things get increasingly messy from here.

Remember, there are times to grow capital and there are times to preserve capital. In this kind of market, we want to be focused on the latter.

The line in the sand for the US 10-year yield is 1.4%. If we’re below there then bonds are likely catching a major bid and creating a headwind for risk assets.

Also in that conversation is Regional Banks $KRE relative to the S&P 500 $SPY.

Notice how similar these two charts look! For this reason, we use this ratio as a leading indicator for interest rates... And right now, it's suggesting that yields continue to grind lower.

As long as KRE/SPY is stuck below overhead supply, it’s hard to imagine we’re in an environment that is conducive to higher interest rates. Instead, we’re probably stuck in a sideways and messy market, full of mixed signals.

If nothing else, this kind of market environment is at least valuable in the sense that it reminds us of the importance of following our best practices.

That brings us to our next point...

4. We Can Only Trade What’s in front of Us!

The sloppy market conditions of the past few months have wiped away many of the relationships and correlations that often exist in trending markets.

Plain and simple, it’s a bifurcated and mixed market out there. There are names we want to buy, and there are names we want to sell. Likewise, there are plenty of areas we simply want to stay the hell away from until the smoke clears.

During times like these, it's essential not to overthink the intermarket picture.

A great example of this is the recent breakout in Crude Oil:

When Crude finally cleared overhead supply near 66 earlier this month, energy stocks and even other energy-based commodities did not follow suit.

Explorers & Producers, Oil Services, and the Energy Sector as a whole remain below key levels of overhead supply. Even Heating Oil and Gasoline had initially failed to move higher with Crude.

But we're starting to see this change as Gasoline has since resolved higher and some of the Energy subsectors, such as E&P stocks are showing signs of breaking out as XOP presses up against fresh highs at a key level of interest.

Meanwhile, the breakout in Crude has stuck, and it’s more than halfway to our target of 76. Now that we're seeing signs of participation picking up from other areas of the Energy market, we think the sector could reassert its leadership here and be an area we could lean on for long opportunities in the near future. 

We’ll have more on this later in the week as we're going to do a deep dive on this possible rotation back into Energy, including the burgeoning strength from Natural Gas of late.

But the key takeaway here is not to let the noise of intermarket analysis affect our judgment and cloud the clear opportunities that are right in front of us.

5. Is QQEW The Chart Of The Quarter?

Speaking of leadership, how about the recent comeback from Tech and Growth!? The Equal-weight Nasdaq 100 $QQEW is easily the Chart of the Quarter in our opinion.

Risk is well-defined at the 110 level as price coils at the upper bounds of an ascending triangle formation.

If we're above there, the bias is higher for these large-cap growth stocks. And seeing as the Nasdaq 100 is not only breaking out on a cap-weighted basis but that the equal-weight index also looks poised to do the same only speaks to the broadening participation we're seeing beneath the surface for these stocks.

Breadth isn't great in many areas right now, but it is mixed. We're seeing some ugly deterioration in some areas, but we're also seeing a healthy expansion in others. Growth stocks are one of those areas right now.

As always, Premium Members can rewatch the Conference Call and view the slides here!

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We hope you enjoyed this post. Thanks for reading, and please let us know if you have any questions!

Allstarcharts Team