July Strategy Session: 3 Key Takeaways

July 7, 2023

We held our July Monthly Strategy Session on Wednesday night. ASC Premium Members can click here to review 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. Dow Theory Confirms the Bull Market

One of the better-known Dow Theory tenets is the concept of confirmation, as the Dow Jones Industrial and the Dow Jones Transportation averages should trend in the same direction.

It just so happens the averages are confirming the underlying trend today, and it's bullish.

Check out the Dow Jones Industrial Average $DJI, the Dow Jones Transportation Average $DJT, and the PHLX Semiconductor Index $SOX pressing against new highs in tandem:

We add semiconductors to our analysis as we view these companies as modern transportation stocks. Regardless, all three indices provide valuable insight into the overall market health and the future direction of stocks.

Whether you look at technology or cyclical groups, the vast majority are participating to the upside. And it shows at the index level!

Based on the weight of the evidence and a theory handed down by Charles Dow over 100 years ago, our conviction in the primary uptrend in US equities strengthens as we head into the back half of the year.

2. Industrials Set Record Highs

When we dive beneath the surface looking for confirmation on a sector level, the Industrial Sector ETF $XLI demands our attention as it reaches new all-time highs.

XLI includes a diverse grouping of stocks, making it an excellent gauge to measure market health. Unsurprisingly, it also holds the strongest correlation to the major US averages of any market sector.

After a year of consolidating in a well-defined range, buyers absorbed all the overhead supply and sent prices to record highs.

As long as XLI holds above those former all-time highs, we want to bet on a healthy market in the foreseeable future and continued rotation into other cyclical areas of the market.

3. Rotation and Rates Point to Energy

Two developments illuminate the markets: a healthy rotation among stocks and a persistent rise in rates.

As these two key themes guide the markets into the second half of the year, our attention turns toward energy.

The overlay chart of the US 10-year yield and crude oil futures highlights why:

If rates continue to rise – and we see no signs suggesting otherwise – crude oil and energy more broadly will most likely follow. Notice how closely these two charts track each other over longer time frames.

We’re also witnessing a robust rotation into industrials and burgeoning strength from materials.

We imagine this theme will continue to play out in the coming months and quarters as buyers bid up other procyclical sectors of the market.

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