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.
We've been pretty obnoxious about our position that markets are a total mess these days. But it is what it is, and we can only play the hand we're dealt.
You can try picking profits out of a trendless environment but at the end of the day, most investors are better off on the sidelines. Imposing one's will upon the market is rarely a winning strategy. We'd rather trade what's in front of us.
We've covered the best evidence from both the bulls and bears camp of late, and played devil's advocate with the data we have. We continue to track and point out the most important upside and downside resolutions across global markets. And we keep pounding the table on the theme that so many significant risk assets are currently trading at critical resistance levels.
While the market remains bifurcated, bulls have put some points back on the board since our last report as a handful of stock market indexes, and even energy-related commodities have broken out and reclaimed key prior highs. This is evidence of risk appetite.
At the same time, after some mean-reversion last week, we're anticipating further US Dollar strength which is likely to remain a headwind for many dollar-denominated risk assets.
So let's start right there with our Currency table this week:
After a little bounce in EUR/USD, is King Dollar ready to take control and send this pair back toward its neckline, and potentially lower from here?
We think there's a good chance, but we'll just have to wait and see. In a post last week, we covered a variety of vehicles we can use to take advantage of this tactical uptrend in the US Dollar.
And what kind of environment are we likely in if the US Dollar is continuing higher and completing a bearish-to-bullish trend reversal while risk-off pairs are under pressure? We'd imagine it's one where risk-assets such as commodities are struggling, right?
When it comes to measuring the degree of risk and cyclicality investors are seeking, we like to look at our old favorite the Aussie/Yen:
Similar to many USD pairs, it looks quite vulnerable here as it recently resolved lower from a continuation pattern after hitting a shelf of resistance at its prior highs.
This is typically a solid warning sign for procyclical commodities so let's take a look at what's going on there now:
We can already see investors shying away from the more risk-on contracts over shorter timeframes. We discussed this deterioration in areas like Copper and Lumber in our last report.
But what about Crude Oil and its energy-related peers? They've barely blinked amid the recent rally in USD! And last week we saw some strong confirming data of the price action in crude as Gasoline and Heating Oil futures both broke out to fresh multi-year highs.
Here's a look:
We'd like to see a little more juice behind these moves but new highs are new highs, and we're also seeing some confirmation of this strength from equity markets.
Here's a look at two popular energy industry ETFs, Oil Services $XES and Exploration & Production $XOP:
As you can see in our US Industry table, XOP was last week's biggest gainer. But sellers came right out to start the new week and snuffed out any momentum that seemed to be building at these key levels.
Let's move over to our Industry table.
As with most things right now, the signals from equity markets are a mixed bag as it relates to energy. We have XOP which is already above key former support at its 2019 lows. And on the other hand, we have XES which is rolling over at its corresponding 2019 lows as this area is now acting as resistance and putting a lid on the recent rally.
So who's going to end up being right at the end of the day? We'll just have to wait and see. But for now, the relative strength can only be seen as a positive as these subsectors are outperforming across every timeframe.
Let's jump over to our US Sector table now and see what's happening on that front:
Once again, Energy was the big winner with a 5.6% move last week, but it still wasn't enough for the Large-Cap Sector SPDR $XLE to break out of its current base to new highs:
Bears came out of the woods like clockwork to defend this key level of interest at the 2018-2019 lows. In fact, this was the third attempt since March to break above this resistance zone around 54-56.
So, was that it, and now we roll over here? Or, do bulls have enough in the tank for another go? Yet again, we can only be patient and weigh the latest data as it comes in. For now, it's still mixed but leaning in the bull's direction. There are some well-defined risk/reward opportunities at current levels that we can swing at in the meantime.
Speaking of opportunities, how about the resurgence from growth and technology during the last few weeks? First, we saw the Nasdaq and Growth break to new highs. Soon Large-Cap Technology $XLK followed, and now we're getting confirmation from many of the groups' most important subsectors.
For example, last week Internet and Software closed at fresh all-time highs... And to kick off this week, we now have confirmation from semiconductors as well:
You already know how we feel about this group of stocks. They are the modern-day equivalent of the transportation industry. They carry both growth and cyclical characteristics. Just like you can't have a party without "chips," you can't have a bull market without semis! This is a BIG feather in the cap for bulls.
