December Strategy Session: 3 Key Takeaways

1. International

The All-Country World Index (AWCI) is one of the most important equity indexes on Earth, as it represents a nice mix of the largest stocks from developed markets. Due to the heavy US exposure, it’s also one of the strongest global indexes we track. Notice how price is currently at a logical level of overhead supply. 

When we zoom out, the primary trend is very much intact, and price is currently coiling in a flag pattern. We can see this action developing in various other international indexes as well. 

When we zoom in, though, the tactical trends are not nearly as bullish for many stocks around the world as they are for ACWI. In fact, many of them appear to be breaking down from their year-to-date ranges.

If the strongest stocks in the world run into overhead supply and consolidate, what are these weaker stocks going to do? We’re keeping a close eye on many continuation patterns in the global indexes right now. If we start to see these charts resolve lower, we want to be on the sidelines.

2. Breadth Deteriorates Further 

Conditions have really weakened beneath the surface, as we’re seeing the highest readings in many of our new lows indicators since Q1 of 2020.

When we look at advance/decline (A/D) lines, they've all failed to hold their new highs from last month. The S&P 500 and the NYSE have been the strongest, but the Nasdaq A/D line has been trending steadily lower all year.

As you can see in the chart below, it just made new 52-week lows. Meanwhile, the NYSE A/D line is back below its May highs after failing to break out. The same is true for the S&P 500, S&P 600, and S&P 400 A/D lines as well.

These negative breadth developments suggest there's a lack of strength and participation beneath the surface right now and that the indexes are vulnerable to catch lower.

3. The Bond Market Sniffs Out Trouble

Now that Federal Reserve officials are publicly acknowledging inflation as something other than “transitory,” Treasury Inflation-Protected Securities (TIPS) and inflation expectations are rolling over. 

So, is this just a minor "buy the rumor, sell the news" event, with the primary trend eventually reasserting itself? Or is the bond market sniffing out some real trouble ahead for risk assets?

We use the TIPS/IEF ratio to gauge the market’s inflation expectations. When this ratio is rising, it means investors are pricing in higher rates, reflation, and global growth. It provides valuable information for our outlook on risk assets, as the two have a very positive relationship.

As you can see in the chart below, it also has a strong correlation with rates. Bulls want to see the US 10-year yield find support at 1.40% and the TIP/IEF ratio to sustain its recent breakout above current levels. 

If these charts resolve lower, we’re likely in an environment where stocks and commodities are under increasing pressure.

We’re already starting to see interest rates struggle with the 30-year violating its summer lows.

The bottom line is that the bond market needs to get its act together… and it needs to do it fast! Rates need to dig in and climb across the curve, and TIPS should begin to outperform on a relative basis.

If these things are happening, we’re likely to see critical stock market indexes like regional banks and mid-caps reclaim their former highs and repair the recent damage.

Those are some of the main takeaways from this month’s strategy session.

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

Allstarcharts Team