March Conference Call: 5 Key Takeaways

1. The Inflation Trade Persists

Inflation isn't showing any evidence of slowing. In fact, it's just the opposite.

The US 10-year yield, the TIPS versus Treasuries ratio (a measure of inflation expectations), and the CRB Index are all making new highs in tandem.

This tells us that market participants are pricing in rising inflation and higher interest rates in the future. One takeaway from all this is that the world surely isn’t coming to an end anytime soon if these trends are in place.

But we already knew that. What we’re concerned about is how to position ourselves accordingly.

The best course of action in this environment is to allocate capital to assets that perform well during periods of inflation and rising rates. The most obvious among them would be commodities.

As you can see in the bottom pane of this chart, commodities have been working and are still working. We think they’ll keep working in the future also as this environment probably isn’t going away anytime soon.

The bottom line is these new highs support the reflation and global growth narrative and suggest that commodities and commodity stocks are where we want to focus for long opportunities.

2. Continued Strength From Cyclicals

It's all about rates, inflation, and commodities these days.

When these charts are trending higher, it’s normal for cyclicals and value stocks to outperform. So it's no surprise that’s exactly what we’ve been seeing in recent months and quarters.

With most stocks under pressure this year, these sectors continue to buck the trend and exhibit impressive relative strength.

The chart below shows materials, industrials, and financials rebounding off their respective range lows. While growth stocks have mostly resolved lower, these cyclical groups continue to consolidate in prolonged continuation patterns. 

Outside of energy, these are the areas that do well in a rising rate environment. As such, we want to continue to lean on the strongest stocks from these leadership groups for long exposure.

This strategy has served us well since last year now, and we see no signs of it stopping. Strength from commodities and cyclical stocks is likely to remain a major theme for years to come.

3. Laggards Look for Support

When assessing the overall market, one question we’re always asking is, “How are the weakest and most vulnerable stocks doing?”

The answer is, after a very rocky start to the year, they're finally showing some signs of a bottom.  

Below is a triple-pane chart showing the IPO Index $IPO, the Biotechnology ETF $IBB, and the Online Retail ETF $IBUY, all finding support at key former highs from 2018 and 2020.

The fact that the weakest stocks have stopped going down and appear to be carving out a tradable low is encouraging for the broader market, and risk assets in general.

Bulls want to see these laggards defend their former highs and start building out trend reversals. While there is still plenty of work to do, they’ve already taken some important first steps.

4. Resistance Around the World

When it comes to stocks outside of the US, they’ve endured severe damage over the past month or so.

While commodity-centric countries remain resilient, developed Europe and China have experienced aggressive selling pressure. Due to their heavy weightings, they’ve dragged the international averages lower with them. 

At the index level, the line in the sand is those good ol’ 2018 highs. This represents a critical level because it is when risk peaked around the world during the last cycle. 

If that weren’t enough, the market confirmed this is a key area of interest when prices reclaimed these highs and began consolidating slightly above them last year.

Recently, these ranges have resolved lower, marking a significant data point for the bears. This means risk is now to the downside at the index level and we want to fade strength until this damage is repaired.

With that said, there are still plenty of favorable opportunities outside the US that we can invest in via individual country ETFs.

And guess who the international leaders are these days? That's right: countries with the most exposure to natural resources and commodity markets.

5. Risk Appetite Rebounds

As for risk appetite, it’s still a mixed bag out there. With that said, the evidence is certainly skewed in favor of the bulls.

While most of our risk indicators are still stuck in sideways ranges, some have resolved higher recently. Examples include the AUD/JPY, stocks versus bonds, and even the TIPS versus Treasuries ratio. All of this is supportive of higher prices for risk assets.

With that said, there are also some critical risk appetite ratios that appeared to be resolving lower over the past month.

Discretionary versus staples stocks and high-yield bonds versus Treasury bonds immediately come to mind. Here’s a look at the latter:

This is the definition of a kick-save and a beauty.

The blue line (HYG/IEI) represents the inverse of credit spreads, so it's one of the more important ratios we look at. While it just made a swift move to fresh 52-week lows, it quickly recovered and is now right back in its old range.

The discretionary versus staples ratio just did the same thing. Seeing these ratios reclaim these key levels is a very bullish development for risk appetite. Notice how the S&P followed in a similar manner.

As more and more of these ratios resolve higher, it will be solid evidence that a healthy degree of risk-seeking behavior is present in markets. We’re headed in the right direction, but there's still work to be done.

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

As always, Premium Members can re-watch the Conference Call and view the slides here!

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