In this post, we want to step back and see what some of the longer-term weekly and monthly charts are suggesting for stocks and the other major asset classes.
Here's the Nifty 50 which spent the last two years grinding slightly higher as momentum diverged negatively. So far this year, prices have fallen 40% and retraced 38.2% of their entire 2001-2019 rally...in three months. From a risk management perspective, bulls need to see 8,000 hold in the Nifty 50 or there is further downside risk towards 6,200.
When markets go through periods of elevated volatility/stress, many market participants look to catch the exact bottom, but a better approach in our view is to buy on the way back up!
The trend for stocks is down. When they do rally, they scream dead-cat bounce. And bonds keep going out at new all-time highs every week. Gold is at its highest prices in 7 years and Interest rates are in free-fall along with bank stocks. What type of environment does this appear like to you? Is it the kind of market where we want to be buying stocks aggressively, or is this the type of market where we want to be smaller, cash heavy and more defensive?
Let's try to figure it out together.
First of all, Industrials historically have the highest correlation with the S&P500 of all the S&P Sectors. This is what that group currently looks like. One of our most basic technical principles is that former support turns into resistance. We call that Polarity. You can see this taking place in this sector index:
Every weekend we publish simple performance tables for a variety of different asset classes and categories along with brief commentary on each.
As this is something we do internally on a daily basis, we believe sharing it with clients will add value and help them better understand our top-down approach. We use these tables to provide insight into both relative strength and market internals.
This week we want to highlight our US Equity Index and Sector tables, as they are both showing continued evidence to support some of the trends we've discussed recently.
Did you see Consumer Staples go out at new multi-year relative highs yesterday? The strength is in Staples, not in Banks or Industrials, for example, which keep making new relative lows.
So why should we care?
"JC, no one cares about staples, why does this matter?"
Well, as it turns out, Consumer Staples relative strength is one of the most reliable indicators of market strength and weakness that exists. You see, when stocks are doing well, Consumer Staples tend to underperform the rest of the market. When stocks are doing poorly, Staples are the leaders.
Think about it. No matter how bad the economy gets, we're still going to brush our teeth, wash our dishes, smoke cigarettes and drink beer right? As a society, I mean. Well, those are consumer staples. This is the group of stocks that outperforms as stocks fall, which makes perfect sense.
Here is the chart of Staples breaking out to new multi-year highs relative to S&Ps:
It's hard to have a conversation about the previous bull markets in the United States without including Apple $AAPL. It hit a Trillion Dollar market cap and actually doubled in value last year, believe it or not. This is the poster child for big strong US stocks.
Today, I want to talk about just how clean this stair-step pattern has been for the stock. It's inability to continue this bullish tradition could mean big trouble for US Stocks. However, holding on to last month's lows could mean the worst might be behind us for the overall stock market. My bet is on the former, more volatility, but the market doesn't care what I think. So let's try to figure it out together.
As always, thanks to everyone for participating in this week's Mystery Chart. Almost all respondents were buyers. A few also mentioned they would only want to be long against potential support at the prior lows which is likely the same approach we'd be taking with a long-term timeframe.
With $VIX still holding above 50 and picking a direction is a crapshoot here, I'm still on the hunt for delta-neutral premium selling opportunities.
The way I do it is I scan the most liquid ETFs out there and rank them by volatility. And then I look for evidence of sideways action forming, or at least some very clear risk management levels to lean against.
The market rallied almost 20% in just three days after making new lows last Monday. Stocks recently sold off in record fashion so it's no surprise to see them bounce with the same ferocity. But with the VIX still elevated above 50, we're not out of the woods yet and should expect the swift moves in each direction to continue for now.
Some say we're in a new bull market, but the charts tell us we're actually at a logical level for what appears to be no more than a bear market rally to stop and reverse.
