February Strategy Session: 3 Key Takeaways

February 12, 2024

From the Desk of Steve Strazza @Sstrazza

We held our February Monthly Strategy Session last week. ASC Premium Members can click here to watch the replay and download the chartbook.

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 Divergences Are Adding Up

With the best three-month period for US equities now behind us, the market could be in for a rough hangover.

A growing list of bearish divergences has arisen in the last few weeks, indicating a more risk-averse tone among market participants.

The following chart is an excellent example of this theme:

Not only are transports not confirming the new highs in other major averages, but breadth is deteriorating beneath the surface, momentum is waning, and our favorite risk appetite indicators suggest a defensive rotation.

As long as these bearish developments are in place, we want to proceed with caution from the long side.

While divergences like this one signal corrective action in the short-term, the primary trends remain firmly in place and pointing higher. Any selling pressure is likely to be counter-trend in nature.

2. Beware of the Dollar

We've stated it many times. It is all about the US dollar.

When times are tough, money flows into the ultimate safe haven: the US dollar.

The inverse relationship between the dollar, and risk assets, specifically stocks, has been as strong as ever in recent years.

A weak dollar is positive for stocks, while a strong dollar puts pressure on them.

As long as DXY keeps rising, we’re likely to see some give back from equity markets. The S&P 500 and DXY have been rising together in 2024, but that’s not a correlation we want to bet on lasting. We think it’s only a matter of time before the strong dollar stifles the rally in stocks.

3. A Structural Bull Market

Despite the warning signals from the dollar and some risk appetite ratios, many of the most important sectors and industry groups remain in structural uptrends.

The chart below shows the Industrial Sector $XLI holding above those former highs from 2021: