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. While this remains the case, we've seen some positive developments play out lately... particularly the renewed strength from cyclicals and offensive assets.
We've covered the best evidence from both the bulls and bears camp in recent months, and even 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 two major themes (among others):
- The market is messy and full of mixed signals.
- Many significant risk assets are currently trading at or below critical resistance levels.
While things remain bifurcated, when we focus on the developments over the past week or two, there's no denying bulls have put some serious points back on the board. Since our last report, we've seen breadth bottom out and rebound as participation has broadened, led by some much-needed strength out of the value sectors.
Many of the topping patterns we discussed just over a week ago now look to have failed, as many charts have reclaimed and stabilized above key risk levels.
Yields carved out a tradable low and have been rallying higher. And we're still experiencing an influx of breakouts from commodities. We're also seeing some risk-appetite ratios press back to highs.
Oh, and how could I forget: The Dollar is still a hot mess. The jury remains out on that one, but we're watching it closely.
So while there's still plenty of work to do, the pieces finally seem to be falling into place... for now.
With that as our backdrop, let's start with one of the major hurdles that bulls are still facing.
Here's our International ETF table: 
We believe these are some of the most important charts in the world right now. At the very least, they do an excellent job of illustrating one of the most important themes currently playing out in markets... overhead supply.
There is some serious resistance for many of the major averages to work through. And it's not just Developed Europe $VGK. It's not just Emerging Markets $EEM. It's the whole world, outside of the US $VEU.
And it's not just stocks! We're seeing it in other risk assets as well, like Copper.
But the bottom line for global equities right now is simple: Markets remain trapped beneath significant overhead supply. Before we can give the "all systems go" for stocks, we need to see these indexes start resolving higher and reclaiming those key pre-financial crisis highs.
When we zoom in on Emerging Markets, it looks like we could be headed in that direction, as the index just ripped higher after a quick shakeout move beneath its 2018 highs around 52.
We talk a lot about how failed moves are often followed by strong reactions in the opposite direction. If that's going to be the case, the time is now for Emerging Markets. But even if we see it, there's another test not far overhead at the pre-financial crisis peak and year-to-date high in the mid- to upper 50s.
Here's our global index table now:
What's not shown in the return stats above is any year-to-date information. But, if it was, you'd see that Japan has gone absolutely nowhere all year. The Nikkei is literally trading at the same level it was coming into 2021. Here's a look:
While they've had every chance, bears have been unable to punch a lot of these continuation patterns lower - and that's even true for some of the weakest areas around the globe... like Japan and Emerging Markets.
The ball is back in the bulls' court for now, but if markets are really going to shift back toward a more risk-on tone, we're going to need to see these kinds of consolidations do more than just not break down. They need to start breaking higher. And we think that could happen sooner rather than later. After all, they can't go sideways forever...
Now let's check in on stocks in the US, starting with our Index table:
The outlook has been far more positive for domestic equities, and that remains the case. Last week, we talked about how US Large-Cap Growth was still the best trade in town... especially when it comes to US versus ex-US stock indexes. This remains the case, as most US large-cap averages continue to trade at or just off all-time highs.
But we've written a lot about the recent strength from the laggards over the past few weeks. Call it rotation. Call it expansion. Either way, seeing more cyclical and value-oriented areas start to participate is not bearish.
Due to their relatively heavy weightings toward Financials and Industrials, SMIDs and micro-caps tend to outperform in environments where value is outperforming. Here's our Mega-Cap versus Micro-Cap ratio stopping and reversing at its key prior highs from over a decade ago:
Seeing leadership shift back down the market-cap scale would be a bullish development and would likely occur in an environment where breadth is continuing to expand. All good stuff.
