From the desk of Steve Strazza @Sstrazza
We held our February Monthly Strategy Session last week. Premium Members can access and rewatch it here.
Non-members can get a quick recap of the call simply by reading this post each month.
By focusing on long-term, monthly charts, the idea is to take a step back and put things into the context of their structural trends. This is easily one of our most valuable exercises as it forces us to put aside the day-to-day noise and simply examine markets from a “big-picture” point of view.
With that as our backdrop, let’s dive right in and discuss three of the most important charts and/or themes from this month’s call.
1. The Breadth of Momentum
The stock market continues to progress as we see an expansion in participation at the individual stock level.
Earlier in the month, the Russell 3000 $IWV saw more new 52-week highs than at any time over the trailing year.
Another way to measure market internals is by assessing the percentage of stocks overbought and oversold. When we look at how many stocks are seeing bullish momentum readings we are really analyzing the breadth of momentum for the broader market.
This chart shows the highest percentage of NYSE stocks achieving overbought readings since spring 2020. If you can remember, back then, it was a great time to buy stocks.
These kinds of breadth thrusts tell us that buyers are becoming increasingly aggressive as prices advance. More importantly, they tend to occur in the early stages of new bull markets.
2. DXY Digs In
The dollar is back on the rise.
After falling for four straight months, the US dollar index $DXY has come back to life in recent weeks. Whether the near-term dollar strength turns into a more sustained trend is anyone’s guess.
But as long as it trades above last year’s June pivot lows, we have to give the dollar the benefit of the doubt.
100 is more than just a key psychological level, it also coincides with the 2020 highs (not shown in the chart) for DXY. A bout of USD strength off this critical polarity zone makes sense, especially considering the dollar has fallen more than 10% since late September. It’s also interesting it never hit oversold conditions on the 14-day RSI during such a steep decline.
It wouldn’t be surprising to see DXY continue to bounce over the near term. If it does, it is likely to produce stiff headwinds for global risk assets. With that said, stocks have remained resilient so far.
3. Growth Gets Back in Gear
One of the main themes we’ve seen unfold as stocks have rallied during the last few weeks is steady rotation into the most beaten-down areas of the equity market.
Whether you look at ARK funds, social media, internet, or Chinese equities, all these former laggards have been outperforming for some time now.
The relative trend in growth versus value is an excellent illustration of this, as it has surged in a near-vertical line recently.
It’s important to note that while growth has outperformed, value has done just fine on an absolute basis. It’s not that value stocks aren’t trending well. In fact, they look great. It’s just that growth stocks are moving higher at a faster pace right now.
In bull markets, this behavior is to be expected as the weakest groups tend to play catch-up with the strongest ones. That’s exactly what we’re seeing today.
Those are some of the main takeaways from this month’s strategy session.
Thanks for reading, and please let us know if you have any questions!