August Strategy Session: 3 Key Takeaways

Steve Strazza
August 3, 2022

From the Desk of Steve Strazza @Sstrazza

We held our August Monthly Strategy Session Monday night. Premium Members can access and re-watch it here.

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. It’s A Dollar Story

Any which way you slice it, it all comes down to the dollar. It doesn’t matter whether we’re looking at the US Dollar Index $DXY or emerging market currencies. It’s a dollar story. And it impacts risk assets.

The overlay chart of the Emerging Market Currency ETF $CEW and the S&P 500 index $SPX highlights critical former lows. In the spring of 2016 and 2020, both these indexes bottomed around the same time before experiencing significant uptrends.

Now that EM currencies are back at the scene of the crime, will we see similar action as we have in the past? It’s anyone’s guess.

But if CEW is breaking below that crucial shelf of former lows, then we have to imagine stocks are making new lows as well.

2. Stock Market History

With July in the books, two of the most critical areas of the market successfully retested key former highs.

As you can see in the chart, Financials $XLF pulled back to the same levels they were before the financial crisis. Home Construction $ITB did the same thing, finding support at its subprime crisis highs.

It’s impossible to overstate the importance of these former highs. Not only are these groups excellent gauges for global growth and risk appetite. They're also the sector culprits from the financial crisis.

With so much price memory at current levels, it's no surprise to see buyers step in here. The next key piece of information will come from how prices react at these former highs. 

If they can't hold these levels and get stuck below the 2007 highs, the structural trend for these economically sensitive groups will be broken and won't bode well for the broader market and risk assets in general.

3. Risk Appetite Confirms

As stocks continue to rally off their summer lows, we’re looking for confirmation of the recent strength from risk appetite indicators.

Some of the best information about how investors are positioning themselves comes from the Consumer Discretionary $XLY versus Consumer Staples $XLP ratio, shown in black below:

The fresh three-month highs in this ratio supports the near-term strength we’re seeing from stocks.

We’ve also included the ARK Innovation ETF (ARKK) in the chart in order to illustrate the strong correlation. 

In an environment where investors are favoring risk-on stocks over defensive stocks, it makes sense to see growth indexes like ARKK find a floor and start moving 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

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