April Strategy Session: 3 Key Takeaways

April 11, 2022

From the desk of Steve Strazza @Sstrazza

We held our April Monthly Strategy Session last week. Premium Members can click here to review the recording and download the chartbook.

Non-members can get a quick recap of the call simply by reading this post each month.

By focusing on long-term, monthly charts, the idea is to take a step back and put things into the context of their structural trends.

This is easily one of our most valuable exercises, as it forces us to put aside the day-to-day noise and simply examine markets from a “big picture” point of view.

With that as our backdrop, let’s dive right in and discuss three of the most important charts and/or themes from this month’s call.

1. Winners and Losers

So far, 2022 has been a tale of two markets.

On the one hand, cyclical stocks continue to show impressive leadership, with many groups trading just off highs.

But then there are growth stocks, which continue to underperform significantly.

While this trend is really nothing new, it has accelerated notably in recent months.

The bubble chart below is a great way to visualize this theme.

Notice how the growth ETFs are clustered in the lower left, while the cyclical and value-based funds are in the upper right.

The dispersion between winners and losers is at historic levels.

Whether the leaders catch lower or the laggards eventually play catch-up is something we’ll have to wait and see. To date this year, the two are moving in opposite directions.

As long as this is the case, the best course of action is to continue positioning ourselves in the strongest groups while staying away from the weakest ones.

There is no evidence this leadership is flipping anytime soon.

2. Emerging Participation

When we dive beneath the surface to measure the health and internal strength of stock markets around the world, one region really stands out.

While fewer and fewer stocks in developed markets make new highs, participation has been expanding in Emerging Markets $EEM all year.

Below is a quadruple-pane chart showing the advance-decline lines of a handful of major indexes. Notice how EM looks different from the others.

The Emerging Markets Advance/Decline line is making new highs, whereas the NYSE's, the Nasdaq's, and developed markets' A/D lines have been dragging steadily lower since last year.

This speaks to the strength and broadening participation in commodity-centric countries and cyclical stocks outside of the US.

While China continues to drag down the Emerging Markets Index, we’re seeing constructive internal strength from its other constituents. This is particularly true for Latin American countries.

This is a positive for world equities, but until we see this strength spill over to Asia and developed Europe, we need to be very selective with our ex-US exposure.

Similar to the US, there are stocks and regions that are working around the world, and there are plenty of others that are not. We want to focus on the former for long opportunities.

3. Banks Threaten to Break Down

We continue to see more and more economically-sensitive groups falter. Transports, semiconductors, and homebuilders are all breaking down from short-term tops.

Another critically important risk-on group that is under pressure is financials. Among them, the banks have been particularly weak.

The distribution patterns in the below charts have all been completed in recent sessions. Money-Center Banks $KBE, Regional Banks $KRE, and Community Banks $QABA are all pressing to their lowest levels since Q3 of last year.

The fact that banks are violating critical support levels rather than rallying in an environment where rates are rising around the world is a concern.

You can’t have a healthy bull market without participation from financials, and it's hard to have a rally in financials without participation from the banks.

As such, bulls want to see these stocks dig in and catch higher... and they want to see it soon.

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