February Conference Call: 5 Key Takeaways

1. More Downside Resolutions

The stock market continues to be a hot mess. Stocks have been under pressure all year, and the list of charts that are resolving their ranges lower is slowly growing.

The chart below juxtaposes the behavior of two different groups of stocks. As you can see in the lower pane, sellers took control of small-cap growth stocks and pushed prices lower from their range last month.

We want to stay away from charts that look like the Russell 2000 or the Russell 2000 Growth Index, as the risk is to the downside in these lagging areas.

However, we can say the exact opposite about value stocks, as they continue to hold above support and show relative strength.

Value is the only game in town these days. If the Russell 2000 Value Index resolves lower and follows the path of these other small-cap indexes, there won’t be much left for the bulls.

2. An International Line in the Sand

US equities aren’t the only stocks that are rangebound right now. We’re actually seeing very similar action when we look overseas as most diversified international indexes are battling it out at their 2018 highs.

This is a critical level of interest as it represents when risk assets peaked around the globe during the last cycle.

The S&P ADR Index (shown below) is an excellent illustration of the kind of price action we’re seeing from global equities of late.

The All-Country World and EAFE Index look almost identical to this, with the one major difference being that both of them are actually slightly below the 2018 highs right now.

Bulls want to see these levels reclaimed immediately.

The bottom line is that we don't want to see international stocks violate the 2018 highs and join those areas that are resolving to the downside.

If these indexes start breaking down below the 2018 highs, we’ll have to reassess our global growth and reflation theses. At the very least, we’re likely to find ourselves in a more cautious environment for risk assets if this is happening.

On the other hand, if international indexes reclaim and continue to hold these levels, other risk assets are probably doing just fine also.

3. Commodities Crank Higher

When it comes to commodities, crude oil is top of mind as it nears $100 per barrel. But black gold isn’t the only commodity trending well...

We’re seeing commodity contracts break out across the board. 

The chart below highlights this theme as the Commodity ETF $DBC, Base Metals ETF $DBB, Agriculture ETF $DBA, and, of course, the Energy ETF $DBE are all printing new highs.

It’s a clear sign of broadening participation within the commodity space, and it strengthens our bullish conviction on the asset class in general.

Commodities have been the clear leaders for more than a year now, and there are no signs of that changing any time soon.

We want to continue to look for long opportunities in this space.

4. The End of a Decade-Long Trend

It’s hard to imagine anything more bullish for the energy space than $100 crude oil… 

Although, the potential decade-long trend reversal in Energy $XLE relative to Technology $XLK is up there as well.

Technology and growth stocks have dominated the equity landscape for so long that many energy and other value names have become an afterthought.

But it looks like this is finally changing, as the XLE/XLK ratio is breaking out of a multi-year base and reclaiming critical lows from over 20 years ago.

We think a period of sustained outperformance from energy stocks is underway and want to position accordingly, as this trend is likely here to stay a while.

Tech, growth, and US stocks consistently outperformed for over a decade. Now that these trends are reversing in favor of value and international stocks, we think they could enjoy a similar run.

5. Gold Shines Overseas

Gold has been a hot topic in recent weeks, as it’s finally showing signs of strength. However, the shiny yellow metal has been rebounding for months when we look at it priced in other major currencies. 

It recently hit new 52-week highs in euro and Australian dollar terms and even printed new all-time highs priced in Japanese yen.

It’s probably just a matter of time before we see new highs for gold in US dollar terms, as we believe we’re in the early stages of a fresh leg higher for this precious metal.

Despite gold’s near-term strength, the setup needs more time to develop and work through all the overhead supply from the past few years.

Sure, we can get long at current levels, but only with a clear understanding of the potential opportunity cost. It could be weeks/months before buyers are able to absorb all the supply near those former 2011 highs.

But, once they do, we definitely want to be buyers and think there will be plenty of time to ride the trend higher.

For now, our best course of action is to be patient. If this truly is the beginning of a major rally in gold, we’ll have plenty of opportunities to get long after a clear breakout above the former highs.

That’s it for this month’s key takeaways!

As always, Premium Members can click here to review the Conference Call and the accompanying slides!

We hope you enjoyed our recap of this month’s call. Thanks for reading, and please reach out to us with any questions!

Allstarcharts Team