From the desk of Steve Strazza @Sstrazza
Monday night we held our March Monthly Conference Call, which Premium Members can access and rewatch here.
In this post, we’ll do our best to summarize it by highlighting five of the most important charts and/or themes we covered, along with commentary on each
Let’s get right into it!
1. Polarity In Practice
We’ve been pounding the table about the importance of prior cycle highs in major US indices and sectors.
When we go through our charts, plenty of critical levels come into play. This is especially true for the Russell 2000 ETF $IWM and the Financial Sector ETF $XLF.
As you can see, the two charts look almost identical. Both bounced off a shelf of former resistance at the current level for the third time as buyers successfully defended the 2018 and 2020 highs again.
If these critical indexes are above those former highs, then the structural trends remain intact. However, violating these levels will warrant a more cautious outlook toward the broader market and risk assets in general.
2. Bonds and Big Tech Diverge
With interest rates powering higher over the past few weeks again, we’re keeping a close eye on long-duration assets like bonds and tech stocks.
The overlay chart below does an excellent job of illustrating the relationship between these two assets. Like bonds, tech stocks are impacted by movements in rates. Last year as rates were climbing, tech stocks and treasuries followed a similar path lower.
However, since bottoming last fall, they haven’t moved together to the upside as closely.
Here is a look at the Large Cap Technology Sector SPDR $XLK overlaid with the iShares 20+ Year Treasury Bond ETF $TLT. While XLK has been making higher highs and higher lows since December, TLT has made a series of slightly lower highs and lower lows.
This divergence begs the question of who is right here. Are tech stocks tipping the hand of the bond market, and rates will soon catch lower? Or do tech stocks have it wrong, and the bond market is telling us rates will remain elevated?
For what it’s worth, the bond market has the better track record with these things. Regardless, we’ll have an answer soon.
3. International Stocks Surge
International equities have been on fire since they bottomed in October last year, leading the way up on both absolute and relative terms.
This is particularly true for the MSCI EAFE ETF (EFA), which has rallied roughly 35% in a near-vertical line off the 2022 lows, reaching new 52-week highs.
This ETF is one of the best representations of how developed markets are faring. Among its major country exposures are Japan, the United Kingdom, and France, making for almost 50% of the fund.
The fact that EFA is reaching new highs speaks to broadening participation from the most important countries outside the US. This price action supports a fresh leg higher for global equities.
4. All That Glitters
Gold is on the verge of breaking out of a historic base.
But considering the lack of progress Gold has made since its prior cycle’s high back in 2011, we think it makes sense to look at how well Gold has done priced in the other currencies:
Look how far beyond those former cycle peaks Gold has come when you take the US Dollar out of the equation and substitute it with the pound, euro, yen, Aussie, or Canadian dollar.
It’s undeniable. We live in a U.S. dollar-denominated world, so it’s really the USD pricing that matters most.
But when you see what it’s been doing in the other forex, the weight of the evidence suggests it’s only a matter of time before Gold gets going in USD.
5. A New Crypto Bull?
When it comes to investors’ appetite for the riskiest assets, look no further than the world’s largest cryptocurrencies.
Both Bitcoin and Ethereum recently achieved their highest level since the first-half of last year. And let’s not forget where these tokens came from.
The chart above shows BTC and ETH rebounding off their prior-cycle highs from 2017 and 2018. This former resistance turned into support just after the FTX implosion last fall when crypto sentiment was as bad as ever. Fast forward to today, and both of these cryptos have just about doubled from those lows.
As long as BTC is above 30k and ETH is above 2k, the path of least resistance is higher, and we think a new bull market is underway for crypto. We’re looking for participation to expand to more and more altcoins to confirm the price action from the big two.
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!