Every 2 weeks I sit down with the good folks at Benzinga to chat about the markets on their morning radio show. Today we discussed the recent breakouts in important sectors like Technology and Industrials. The fact that we're seeing expansion in breadth across other countries, particularly in Emerging Markets and Latin America, suggests there is real risk appetite out there for stocks. There are many favorable risk vs reward opportunities out there today and we went over several of them this morning.
The market is a never ending puzzle that we are constantly trying to solve. It's not like a jigsaw puzzle where once you put the pieces together your job is done forever. In the case of liquid markets, the pieces of that puzzle are always changing and therefore the conclusions are appropriately evolving. I thought today would be as good of a time as ever to go over the evolution of my macro thesis about stocks over the past 15 months.
Since late March and early April, most of the major stock market indexes around the world, U.S. included, consolidated in a sideways range. The dilemma/argument among my friends and I was in which direction would these consolidation resolve? As it turns, out, it has been to the upside. We're not just seeing the S&P500 and Dow Jones Industrial Average breaking out to new highs, we're seeing similar behavior around the world.
Today we're looking at what I think is the most bullish chart on earth.
Throughout the week I did a ton of intermarket work comparing many markets with each other. This is a great exercise and really helps me get some perspective on the flow of money around the world. Remember, it doesn't just disappear. When money leaves one asset, let's say Japanese Yen or U.S. Treasury Bonds, it goes elsewhere. In this case, we're seeing that money flow towards banks as well as Japanese and European stocks.
There are two ways to use this information. First, simply take the money flow data as confirmation of other things we're seeing around the world, particularly those that we discussed in this week's conference call. Second, through execution purposes benefiting from narrowing or widening of these spreads. I personally use them in both ways.
Here are some of the more interesting developments that I found:
One of the biggest reasons why we've been hesitant to be bullish of stocks, particularly as an asset class, since early April is because of the severe underperformance from bank stocks. Not only do we need participation out of Financials during bull markets, but we need them to lead. Unfortunately, they've been doing the exact opposite, and dragging stock market indexes around the world lower.
Has something changed?
These are the details from yesterday's Mystery Chart
Since the Summer of of last year, the relationship between growth stocks and value stocks has been ironing out what traditionally might be considered a major topping pattern. This would suggest that value stocks should outperform growth moving forward. Last month, however, this ratio confirmed what looks to me like a failed breakdown and bullish momentum divergence. In my experience, this is an ideal recipe for a squeeze higher in the spread.
Every month I host a conference call for All Star Charts Members where we discuss ongoing themes throughout the global marketplace as well as changes in trends where new positions would be most appropriate. This includes U.S. Stocks & Sectors, International Stock Indexes, Commodities, Currencies and Interest Rate Markets. We have been pounding the table on heavy cash positions for the past few months, so we're ready to start allocating that capital this week.
This month's Conference Call will be held on Wednesday July 13, 2016 at 7PM ET. Here are the Registration Details:
If you're one of those people who blindly looks at the S&P500 and thinks stocks are in an uptrend, you can stop reading now and carry on with your rainbows and butterflies. In the real world, the one we live in, stocks have been falling hard for well over a year. Put down your large-cap weighted U.S. indexes for a hot second, and take a look at what's going on.
