May Strategy Session: 3 Key Takeaways

May 4, 2022

From the desk of Steve Strazza @Sstrazza

We held our May Monthly Strategy Session on Tuesday. ASC Premium Members can click here to access the recording and 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. Stocks Are on the Brink

Markets continue to look vulnerable as selling pressure spreads across the board.

The big theme in recent weeks is distribution patterns. As more and more ranges violate their lower bounds, we’re left with completed tops.

The chart below is the equally weighted S&P 500 challenging the lower bounds of its range.

This is an excellent representation of what we’re seeing from the majority of major averages and sector indexes right now.

The question we’re asking ourselves is whether this is a potential topping pattern or simply a continuation pattern.

In the case it’s the latter, we want to be prepared for the underlying trend to reassert itself and prices to continue higher.

Seeing the equal weight S&P 500 dig in at its pivot lows and defend this support zone is a step in the right direction for the overall market.

With that said, there's still plenty of repair work for bulls to do considering all the tops that already resolved lower.

2. It’s Still Early

Since last year, significant changes have taken place beneath the surface for the growth-versus-value relationship.

As growth stocks continue to come under pressure, investors are favoring value-oriented areas at an increasing rate. The energy versus technology ratio is one way to visualize the trend in value versus growth.

As you can see in the chart below, energy just reclaimed the dot-com bubble lows relative to technology.

If $XLE can stay above this level, it would be a huge data point to support our bullish thesis on value and commodity-related stocks.

More importantly, it tells us that we can expect outperformance from energy stocks over the intermediate and long-term.

As for tech and growth, this is just another piece of evidence that suggests we want to stay away. These stocks are likely to be out of favor for a sustained period of time.

We want to continue to focus on energy and cyclical areas for long opportunities.

3. Inflation Trade Takes a Breather

With cyclical stocks continuing to perform well this year, it seems unlikely that inflation has peaked already. But, like any trend, inflation expectations can't move up in a straight line forever.

We think this is a logical level for some digestion.

The chart below shows the Metals & Mining ETF $XME and the TIPS versus Treasuries ratio.

The TIPS versus Treasuries ratio is an excellent measure of inflation expectations. And, in terms of the stocks that do well in inflationary environments, metals and mining are at the top of that list.

This is why these charts look so similar.

Notice how both are challenging logical levels of overhead supply. If these trends are due for consolidation, what better place for it to occur than here?

While we’re betting on some corrective action in the near term, over the long run we still think these trends have room to run. These are very strong primary uptrends, so some consolidation would make sense.

But, afterward, we're anticipate the primary trends will reassert themselves and continue higher.

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