July Mid-Month Conference Call: 5 Key Takeaways

1. Bear Market Breadth

We always want to start our analysis by asking ourselves what kind of environment we’re in. For the past few quarters, the answer to this has been crystal clear. There's no question that this is a risk-off market. 

One of the best ways to measure this is by comparing the number of stocks making new 52-week highs to the number making new 52-week lows.

As you can see in the chart, we’re working on one of the longest streaks in history of new weekly lows outnumbering new weekly highs.

It's been 34 straight weeks!

We would have to go all the way back to the financial crisis to find a streak as long. But it shouldn’t come as any surprise. Most stocks peaked almost a year and a half ago now, and markets have been under pressure ever since. 

Before we can have confidence the bottom is in, we’re going to need to see more stocks making new highs than new lows. Despite the recent rally, we’re not seeing it yet.

2. Ripe for a Rebound

Equities in the US and abroad have been under consistent selling pressure all year.

After completing a topping pattern, downside follow-through has led the Dow Jones Industrial Average $DJI all the way back to its pre-COVID highs.

As you can see in the chart below, these former highs coincide with the 161.8% Fibonacci extension, making it a key level of interest.

We’re seeing strong demand come in at this level and put a floor in the Dow for the time being.

As long as prices are above this former resistance turned support, stocks are likely to keep basing and stabilizing in the short term.

3. Big Test Across the Pond

The Euro STOXX 600 is currently retesting a key level that acted as resistance for more than two decades before the index broke out last year.

These former highs are a logical level for European stocks to dig in and form a tradable low.

If the index can manage to find support here, it would be constructive for international equities.

On the flip side, if the last year was just one big failed move and Euro STOXX 600 falls back within its prior range, continued selling pressure is likely for stocks around the world. Whether indexes can defend these key multi-decade breakout levels will set the tone for risk assets.

We’re seeing similar chart patterns and retests in financials and the Value Line Index right now.

4. The US Dollar is Key

The environment is ripe for a mean-reversion bounce. But if global risk assets are going to dig in and catch higher at these critical former support levels, they’re going to need a catalyst.

That catalyst is the US dollar.

We’ve been pounding the table about dollar strength and the headwinds it creates for risk assets. This overlay chart of the US Dollar Index $DXY and Frontier Markets $FM illustrates the strong inverse correlation well.

As major stock indexes around the world experience throwbacks to prior cycle highs, global equities could use a little support supplied by a weaker dollar.

What the dollar does here could mean the difference between a sustainable bounce and a bear market rally.

5. Are Rates Ready to Roll?

The intermarket backdrop continues to imply lower rates are on the horizon. Whether it's the copper/gold ratio breaking down, or cyclical value stocks underperforming, all the data is pointing to lower yields these days.

The 10-year breakeven inflation rate and our equal-weight commodity index printing fresh lows are also at the top of that list of intermarket evidence.

These aren’t the types of moves that tend to characterize a rising rate environment. Inflation and inflationary assets should be trending higher along with rates. But they’ve been rolling over and making new lows for months.

As the evidence mounts in favor of lower yields, we want to remain open to the possibility of a mean reversion move in bonds and other long-duration assets.

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

As always, Premium Members can click here to review the Mid-Month Conference Call recording and chartbook.

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