From the desk of Tom Bruni @BruniCharting
Tuesday’s Mystery Chart makes an interesting point during these volatile times, so thank you all for your feedback and participation.
Let’s get into it.
This week’s mystery chart was the S&P 500 Transports/S&P 500 ratio (XTN/SPY), which has crashed since late February and is now breaking potential support at the 2011/2012 lows.
Click on chart to enlarge view.
The message of this decline is not actionable. It’s not to go out and short Transports, nor is it to go out and bottom-fish transports.
The key takeaway is that despite the historic volatility on an absolute basis, we’re seeing a continuation of the relative trends that have already been in place for years. Sure, there are one-off situations where a trend/market reversed seemingly out of nowhere, but the majority of the moves we’re seeing are simply an acceleration of the long-term trends we’ve been following for many quarters/years.
Transports underperforming the broader market are an obvious one, but let’s look at some others across all asset classes.
Let’s start with the Dow Jones Trucking Index/Dow Transports Index (DJUSTK/DJT) so that my punny title works. This ratio had broken out prior to the coronavirus outbreak and is continuing in the direction of its underlying trend, only now in an accelerated fashion.
Here are Industrial’s stocks relative to the S&P 500 (XLI/SPY) which broke down in December and have since accelerated to the downside.
European Banks have been relative underperformers…and are continuing their downward trend after failing to reclaim former support/resistance.
In terms of international markets, New Zealand has crushed it relative to US stocks for a long time and continues to do so despite the recent volatility.
That’s Equities, but let’s take a look at Commodities.
Surely the collapse in Crude Oil was a surprise, right? Well, actually an Equally-Weighted Index of Crude Oil, Gasoline, and Heating Oil) peaked relative to the Equally-Weighted Commodity Continuous Index 18 months ago and has been trending lower since.
Here are some trends in the Currency market that have been intact for a long time and are simply accelerating lower.
In the Bond market, we’re watching Treasury Inflation-Protected Securities relative to similar duration Treasuries absolutely collapsing along with the inflation expectations of market participants. Notice that this is coming within the context of an established downtrend.
There are hundreds of examples we could provide but just trust us, they’re out there. Good things typically happen in uptrends and bad things typically happen in downtrends. If you look around at what’s getting crushed and what’s outperforming, it’s most likely what was getting crushed and outperforming before this volatile period began over a month ago.
Shifts in trend take time, they typically don’t happen overnight. By focusing our analysis on the study of trends, particularly those on a relative basis, we can position ourselves to avoid many of the headaches people are now dealing with well before they accelerate. That approach has served us well so far and will continue to on the other side of this mess.
Thanks for reading and please let us know if you have any questions.