July Mid-Month Conference Call: 5 Key Takeaways

1. It’s the Catalyst

We’ve been making the bet for a long time the negative correlation between the US Dollar and stocks will remain in place.

And it’s a bet that continues to pay off handsomely.

Here’s the US Dollar Index $DXY breaking down from a consolidation within an ongoing downtrend:

It’s not important why the Dollar is falling so much that it is, and what it means for equities.

The market has made it clear – a falling dollar produces significant tailwinds as stocks up and down the cap-scale print fresh highs.

We'll continue to lean on this interpretation of a weaker dollar until the market proves otherwise.

2. It’s Not Just Five Stocks

While mega-cap tech stocks are leading the way higher this year, broad participation from smaller stocks increases. 

One easy way to check in on the health of the broader market is by analyzing equal-weighted indexes like the one shown below. This is the Nasdaq 100 $QQEW on an equal-weight basis:

If only the five largest stocks were responsible for all the gains off last year's lows, the equal-weight index of 100 stocks wouldn't be making new highs. 

After gaining roughly 25% from its lows last fall, QQEW is in the process of resolving higher from a bearish-to-bullish reversal pattern.

The path of least resistance is clearly higher for the majority of tech stocks, not just the largest ones.

3. No Financials, No Party!

The Financial Sector $XLF and Home Construction ETF $ITB are considered two economically sensitive groups and an excellent gauge for global growth.

When we overlay the two, we notice they tend to move in the same direction over longer time frames:

However, this correlation broke down earlier this year as ITB rallied to new all-time highs while XLF churned near former support.

Will financials catch up and start to follow homies to the upside? Or should we expect home construction stocks to correct lower toward financials?

Either way, we don’t want to make the bet these markets resolve in opposite directions. 

Big Picture: Buyers need to step in soon to support XLF because stocks don’t have bull markets in the US without financials -- and so far, they are.

4. Rotation is Set Toward Smaller Names

With the financial sector leading the way higher in recent sessions, the odds of a rotation into small-cap stocks increase since this group represents a significant weight in the small-cap indices.

The chart below shows the Russell 2000 Small-Cap ETF $IWM relative to the Russell 1000 Large-Cap ETF $IWB, holding support at former lows from early 2020.

If small-caps are about to enter a fresh period of outperformance, this would be a logical place to start.

Notice that momentum (as measured by the RSI-14 in the small rectangle) has been diverging positively for some time now, adding conviction to a potential bounce.

IWM outperforming its large-cap peers represents a significant data point supporting a healthy rotation towards smaller names and value-oriented areas.

5. Who has it right, stocks or bonds?

The Large-cap growth over value trend remains in place. 

But are growth stocks due for a pause as the value-heavy small-cap indexes find their footing versus the broader market?

Check out the growth versus value ratio (IWF/IWD) overlaid with the long-term US Treasuries ETF $TLT:

A near-term correction for the IWF/IWD ratio could be in the cards, considering it’s approaching its late 2021 highs – a logical area of potential resistance.

Also, notice that TLT never caught higher along with growth stocks despite their previous positive correlation.

This doesn’t mean that growth names have to roll over or that bonds need to rip higher. Instead, it brings us back to the question…

Who has it right, stocks or bonds?

It's difficult to say. But we don’t want to make the bet these charts continue to trend in opposite directions over longer time frames. And based on the extreme positioning in the bond market, US treasuries might be due for a rally.

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!

All Start Charts Team