June Conference Call: 5 Key Takeaways

1. The “Bear Market” Is Old News

Markets have been under consistent selling pressure all year long. Just recently, the S&P 500 entered "bear market territory," as it's officially fallen more than 20% from its peak in January. 

When we dive beneath the surface and look at the most beaten-down areas of the market, these stocks are already in severe drawdowns and have been since late last year.

In other words, this “bear market” is nothing new… we’ve been in one all year.

We're referring to long-duration stocks such as software, social media, and internet, among others. These are the “sector culprits,” which is a phrase we use for those weakest areas that have led the overall market to the downside. 

Last week, most of these groups made new lows.

If these laggards can't catch a bid and carve out bottoms here, we're likely to see the rest of the market keep tumbling too.

2. The Weakest Stocks Stopped Falling

Speaking of "sector culprits," not all of them are making new lows. Some of the weakest areas of the market have stopped falling and are carving out higher lows as they build short-term bottoming patterns.

These were some of the worst performing areas and the poster children of the current bear cycle. We're referring to the Chinese Internet ETF $KWEB, Biotechnology ETF $XBI, the IPO Index ETF $IPO, and the ARK Innovation ETF $ARKK.

Despite being the weakest stocks in the last 16 months, they've been showing relative strength since mid-May.

As you can see in the above chart, while the S&P 500 has continued its decline, these long-duration stocks stopped going down six weeks ago.

Chinese Internet is one that really stands out, as $KWEB has booked a roughly 50% gain since its lows in mid-March.

While this is likely to be a dead-cat bounce, the fact that the worst stocks are showing characteristics of bottoming is a big point for the bulls.

3. Breadth Supports a Breakout in DXY

The direction of the US Dollar Index $DXY in the coming weeks and months will have broad intermarket implications. If the weakest areas of the market are going to lead the way higher, a falling dollar could provide a much-needed boost. 

However, when we look beneath the surface, we see no signs of dollar weakness.

Instead, our US dollar advance-decline line is challenging recent highs, which is evidence of broad dollar strength.

These healthy internals confirm the recent breakout in the DXY and suggest risk assets are likely to experience continued headwinds.

Whether or not this breakout will develop into a sustained uptrend is still up in the air.

We’ll continue to monitor the dollar, as we consider it one of the most important charts out there right now.

4. The Bears Finally Came for Energy

Most commodities, and particularly energy, have remained resilient during the past year despite strong dollar headwinds that have affected most risk assets.

Now that the US Dollar Index is threatening to break out to fresh multi-decade highs, the bull market in commodities is finally coming under pressure. And it couldn’t be happening at a more logical level…

Both crude oil futures and the Energy Sector ETF $XLE are running into an overwhelming amount of overhead supply.

It would make perfect sense to see the strong uptrends in energy stocks and crude oil digest gains at these levels. As long as crude is below 110 and XLE is stuck under 80, that’s exactly what we should expect: more corrective action

When we look to other procyclical areas of the commodity space we’ve witnessed similar corrections take place for months now.

We think it’s finally time for energy to catch lower to its peers.

5. The Divergence in Commodities

Since March, energy contracts have continued to catch higher while most areas of the commodity space have corrected. 

The disparity between energy and the rest of the commodities complex is accentuated when we compare it to base and industrial metals.

With interest rates at a logical level to pause and a potential breakout in the US dollar underway, it’s likely energy catches lower to base metals and the rest of the commodity space.

The question is whether they'll correct through price or time.

One thing is certain: The bears are hungry and energy futures are starting to look like an easy target.

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

As always, Premium Members can rewatch 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