May Strategy Session: 3 Key Takeaways

May 8, 2023

From the Desk of Steve Strazza @Sstrazza

We held our May Monthly Strategy Session last Monday night. Premium Members can access and rewatch 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. Can Financials Hold the Line?

When it comes to the financial sector, volatility remains high as regional banks continue to blow up.

However, the pre-financial crisis highs in the Large Cap Financial Sector SPDR (XLF) remain intact. This is huge, and for bulls, it needs to remain the case.

This level represents where financials peaked during previous cycles in 2007, 2018, and 2020, making it a critical area of interest.

As you can see, price has been holding above this polarity level of around 30.50 for some time now.

We are convinced that the financial sector weakening will not trigger a broader market selloff as long as XLF remains above its pre-financial crisis highs. That's the line in the sand for the bulls. However, if we breach this support zone, there will be significant structural damage and bearish implications for the broader market.

2. Crude Oil Slips Through the Cracks

Crude oil continues to undercut its prior cycle highs before quickly rebounding to repair the damage. In fact, we saw crude fall into the 60s in both March and again last week. However, in both instances bulls stepped in almost immediately to make the save. Whether or not these are false starts or failed moves is the big question. For now, they appear to be fails.

In the monthly chart below, notice how crude just booked its first positive month in April following five months of losses:

Maybe this is the start of something, as this green monthly candle also symbolizes bullish follow-through on the long-wicked candle from March.

For us, it's all about the 2018 highs for crude. The prior-cycle peak marks our line in the sand. When we combine this level with the 2022 lows, we have a critical zone of interest between 70-75.

If we're above it, energy gets the benefit of the doubt. If we're below it, we're out and looking for further downside from the whole group.

3. Key Intermarket Ratios Point Rates Lower

Powell has spoken, so will interest rates finally roll over?

Despite key intermarket ratios suggesting an intermediate-term top in interest rates for over a year now, yields remain elevated.

The Copper versus Gold and Regional Banks versus REITs ratios provide excellent examples:

Notice both ratios peaked in mid-2021, along with many cyclical assets. But their current breakdowns imply that rates have not only peaked but will likely roll over in the coming weeks and months.

To be fair: The Copper/Gold ratio holds within a broader range. Nevertheless, it’s turning lower. And regional banks can’t catch a bid on absolute or relative terms. That's never a good thing.

These are not characteristics of a rising rate environment. Based on the chart above it seems more a matter of when and not if yields catch lower.

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