From the desk of Steve Strazza @sstrazza
Welcome to our latest RPP Report, where we publish return tables for a variety of different asset classes and categories along with commentary on each.
Looking at the past helps put the future into context. In this post, we review the absolute and relative trends at play and preview some of the things we’re watching to profit in the weeks and months ahead.
We consider this our weekly state of the union address as we break down and reiterate both our tactical and structural outlook on various asset classes and discuss the most important themes and developments currently playing out in markets all around the world.
And at present, markets are a total mess and full of mixed messages as most major stock market indexes continue to churn sideways in consolidation patterns, while many risk-on commodities are in corrective phases.
While the weight of the evidence still remains in the bullish camp, bears seem to add to their list of talking points with every passing week. We believe the highest probability outcome over the coming weeks to months is for risk assets to remain in a mixed and messy environment. Once we begin to see evidence that indicates the current "chop fest" is nearing an end, which could simply come in the form of a reduction in the number of bearish data points, we think this party resumes in the direction of the primary trend... which remains aggressively higher in most risk assets.
But as the evidence becomes increasingly mixed, so does the way we want to approach the market and position ourselves to profit from the present environment. While we're still buying plenty of stocks exhibiting leadership all around the globe... for the first time in over a year, we're focused more on shorting the losers.
Check out some of our recent shorts on our trade ideas page.
Last week, we discussed how a lot of the most recent evidence has tilted back in favor of the bulls with a number of upside resolutions, particularly in international equity indexes.
Well, what a difference a week can make. This past week, we saw the opposite as some major risk assets are now failing at key levels.
Again, this speaks to the mixed messages the market is sending now that these holding patterns are beginning to resolve. They're resolving in both bullish and bearish directions... at least for now.
In today's post, we'll offer the opposing view from last week. We will also highlight some key charts that are experiencing bearish resolutions.
Just like we said we'd need to see some follow-through on the bullish data points discussed last week, we'll be looking for the same from these bearish developments.
At the end of the day, there are so many major risk assets and stock market indexes that are close to key levels and critical inflection points that just a few days can change everything.
That means we're on high alert, and we will be the first to let you know if and when anything happens.
Let's kick things off with our Commodities table for a change:
Both Copper and Lumber recently violated well-tested areas of support at their trendlines from last year's lows:
Trendline breaks like these are often one of the first and most classic characteristics of a trend reversal.
But it's not so much what is happening with these economically sensitive commodities right now as much as where we're seeing these developments happen...
Here's a zoomed-out view of Copper:
A failed breakout at those key record highs from 2011 would NOT be a good look here for Dr. Copper, or risk assets in general. We'll be keeping a close eye on this one for sure.
Then there's the recent action in Lumber, sending prices right back to a key level of former resistance:
After collapsing about 40% from its recent highs in just a month's time and violating a major trendline, will this shelf of former price peaks act as support now? We'll have an answer soon...
This 950-1,000 level is the line in the sand for Lumber, and we're currently sitting right on it.
As for Copper, it's those 2011 highs at 4.60... So for now, sellers are in control and the risk is to the downside.
We're already seeing confirmation from the equity market as industry bellwether Freeport-McMoRan $FCX just resolved lower from a bullish continuation pattern. Seeing Lumber follow through and violate our risk level would be additional confirmation that the recent failed breakout in Copper is the real deal.
Considering how similar these two charts look off of last year's low, we think this is the higher probability outcome for now. But remember, these are tactical developments and the structural trend still remains higher in commodities as an asset class.
As we noted in a recent Commodities Weekly post this all comes down to timeframe. You can read our Commodities column, here.
Moving now to our Currency table:
We recently discussed the possibility of a mean-reversion move in the US Dollar... and wouldn't some Dollar strength jive nicely with the current weakness we just talked about from Commodities? You can read more about that here.
But we're also seeing a broader development - exclusive of the Dollar, in the sense that risk-on currencies, in general, are showing signs of weakness. Here is our favorite risk barometer within the forex universe, the Aussie/Yen ($AUD/$JPY):
The Aussie is just holding on for dear life above those key former highs from 2018. It's been coiling in a continuation pattern for roughly 4 months now as momentum has fallen off a cliff.
We're just one down day away from the current bearish momentum divergence confirming and this triangle pattern breaking to the downside. And with Copper and Lumber sliding lower, this shouldn't come as any surprise.
Let's check in on our International Equity table now and play devil's advocate with what we discussed last week: the continued broadening of participation beneath the surface when we look around the globe... even in the weakest areas:
Well, that's changed since last week. Here's one of the weaker countries in our universe that did just break to the downside, Peru $EPU:
Price just violated a key level of former resistance turned support at the 31 level. We want to fade any weakness back toward 31 with a short-term target of 27.
Peru is a part of Emerging Markets $EEM, and you'll never guess what the current technical outlook is at the index level:
It looks almost identical to Copper, as price was just rejected after trying to retest its pre-financial crisis highs at 56 from below. And this comes after a failed breakout that looks eerily like the one in Copper.
The play here is simple. It's a no-touch stuck in its current range. But we're long on a decisive breakout above the former all-time highs of 56.
At the same time, if things go in the other direction, we're short on a violation of the year-to-date pivot lows just beneath 52.
Now for our Global Index table:
Despite lackluster performance from Emerging Markets, much of which is due to weakness from China (EM Ex-China $EMXC is at all-time highs), we continue to see strength from more emerging and frontier market countries, particularly those outside of Asia.
Here are some examples:
What's not to love about this multi-year base breakout to fresh all-time highs for the MSCI Vietnam Index?
And how about its Frontier Market peer, Kenya:
This one also looks poised for a nice base breakout to new all-time highs...
Again, the evidence remains mixed. And this is becoming especially true within equity markets as we're seeing plenty of bullish resolutions... But we also continue to see a swath of bearish data points, even more so when we look at intermarket relationships.
So, let's jump back over to the US and look at some of them:
